ÿþ<html xmlns:v="urn:schemas-microsoft-com:vml" xmlns:o="urn:schemas-microsoft-com:office:office" xmlns:w="urn:schemas-microsoft-com:office:word" xmlns="http://www.w3.org/TR/REC-html40"> <head> <meta http-equiv=Content-Type content="text/html; charset=unicode"> <meta name=ProgId content=Word.Document> <meta name=Generator content="Microsoft Word 9"> <meta name=Originator content="Microsoft Word 9"> <link rel=File-List href="./ilink1_files/filelist.xml"> <title>Recent developments on opposite side of the globe point to the importance of improving public information about the revenues r</title> <!--[if gte mso 9]><xml> <o:DocumentProperties> <o:Author>Richard A. Fineberg</o:Author> <o:LastAuthor>komi la bisquet</o:LastAuthor> <o:Revision>3</o:Revision> <o:TotalTime>47</o:TotalTime> <o:LastPrinted>2003-07-30T01:30:00Z</o:LastPrinted> <o:Created>2004-09-15T06:00:00Z</o:Created> <o:LastSaved>2004-09-15T06:27:00Z</o:LastSaved> <o:Pages>7</o:Pages> <o:Words>4493</o:Words> <o:Characters>25615</o:Characters> <o:Lines>213</o:Lines> <o:Paragraphs>51</o:Paragraphs> <o:CharactersWithSpaces>31457</o:CharactersWithSpaces> <o:Version>9.2720</o:Version> </o:DocumentProperties> </xml><![endif]--><!--[if gte mso 9]><xml> <w:WordDocument> <w:BrowserLevel>MicrosoftInternetExplorer4</w:BrowserLevel> </w:WordDocument> </xml><![endif]--> <style> <!-- /* Font Definitions */ @font-face {font-family:Wingdings; panose-1:5 0 0 0 0 0 0 0 0 0; mso-font-charset:2; mso-generic-font-family:auto; mso-font-pitch:variable; mso-font-signature:0 268435456 0 0 -2147483648 0;} /* Style Definitions */ p.MsoNormal, li.MsoNormal, div.MsoNormal {mso-style-parent:""; margin:0in; margin-bottom:.0001pt; 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margin:1.25in 1.25in 1.0in 1.25in; mso-header-margin:.5in; mso-footer-margin:.5in; mso-title-page:yes; mso-header:url("./ilink1_files/header.htm") h1; mso-paper-source:0;} div.Section1 {page:Section1;} --> </style> <!--[if gte mso 9]><xml> <o:shapedefaults v:ext="edit" spidmax="2050"/> </xml><![endif]--><!--[if gte mso 9]><xml> <o:shapelayout v:ext="edit"> <o:idmap v:ext="edit" data="1"/> </o:shapelayout></xml><![endif]--> </head> <body lang=EN-US link=blue vlink=purple style='tab-interval:1.0in'> <div class=Section1> <p class=MsoBodyText2>Pipelines and the Petroleum Revenue  Take: <span style="mso-spacerun: yes">  </span>Alaska s Experience and Implications for Kazakhstan</p> <p class=MsoNormal style='line-height:150%'><![if !supportEmptyParas]>&nbsp;<![endif]><o:p></o:p></p> <p class=MsoNormal align=center style='text-align:center;line-height:150%'>By Richard A. Fineberg</p> <p class=MsoNormal align=center style='text-align:center;line-height:150%'><![if !supportEmptyParas]>&nbsp;<![endif]><o:p></o:p></p> <p class=MsoNormal align=center style='text-align:center;line-height:150%'>July 19, 2003<span style="mso-spacerun: yes">  </span>(Revised)</p> <p class=MsoNormal style='text-indent:.5in;line-height:150%'><![if !supportEmptyParas]>&nbsp;<![endif]><o:p></o:p></p> <h3><b>Introduction<o:p></o:p></b></h3> <p class=MsoBodyTextIndent><span style="mso-spacerun: yes">  </span>It is widely recognized that Caspian Basin oil is land-locked and must bear the costs of transportation to tidewater in order to compete on the world market.<span style="mso-spacerun: yes">  </span>But the economic implications of this fact are not so widely recognized or well understood.<a style='mso-footnote-id:ftn1' href="#_ftn1" name="_ftnref1" title=""><span class=MsoFootnoteReference><span style='mso-special-character:footnote'><![if !supportFootnotes]>[1]<![endif]></span></span></a><span style="mso-spacerun: yes">  </span>Before most payments to the host government are calculated, transportation costs, such as pipeline shipping costs (tariffs), must be netted out.<span style="mso-spacerun: yes">  </span>Therefore, increases in transportation charges result in decreases to host government revenues.<span style="mso-spacerun: yes">  </span>While this general proposition is simple enough, the mechanics of its execution are typically hidden from public view and can be quite complicated. Pipeline terms can also serve to inhibit development by stifling competition through excessive tariffs, or by limiting access to the line and its associated facilities.<span style="mso-spacerun: yes">  </span></p> <p class=MsoBodyTextIndent>To understand how transportation terms can reduce host government revenues and inhibit competition, this discussion will look at the experience of another remote province with a super-giant oil reservoir, the state of Alaska.<a style='mso-footnote-id:ftn2' href="#_ftn2" name="_ftnref2" title=""><span class=MsoFootnoteReference><span style='mso-special-character: footnote'><![if !supportFootnotes]>[2]<![endif]></span></span></a><span style="mso-spacerun: yes">  </span>The limited public information about the terms for transporting oil from Kazakhstan suggests that the public interest would be well served by understanding the effects of transportation economics on petroleum revenue, and by careful consideration and public review of the implementation of these important arrangements.<span style="mso-spacerun: yes">  </span></p> <p class=MsoBodyTextIndent><![if !supportEmptyParas]>&nbsp;<![endif]><o:p></o:p></p> <h2><u>Alaska s Experience<o:p></o:p></u></h2> <p class=MsoBodyTextIndent2><span style='font-weight:normal;font-style:normal'>Almost all of Alaska s oil is produced on the continent s northern edge, where the largest oil field in the United States was discovered in 1968.<span style="mso-spacerun: yes">  </span>Alaska s North Slope entered production in 1977, peaked at 2.0 million barrels per day (bpd) in 1988 and produces approximately 1.0 million bpd of crude oil today.<a style='mso-footnote-id: ftn3' href="#_ftn3" name="_ftnref3" title=""><span class=MsoFootnoteReference><span style='mso-special-character:footnote'><![if !supportFootnotes]>[3]<![endif]></span></span></a><span style="mso-spacerun: yes">  </span>Oil produced at that remote outpost is shipped south across Alaska on the 800-mile Trans-Alaska Pipeline System (TAPS) to the ice-free port of Valdez, where most of the oil is loaded on tankers for shipment to the West Coast of the United States.<span style="mso-spacerun: yes">  </span>Approximately eight percent of the oil shipped on TAPS remains in Alaska for in-state refinery use.<span style="mso-spacerun: yes">  </span>Since inception, three major oil companies  British Petroleum, ConocoPhillips and ExxonMobil  have controlled more than 90 percent of North Slope production and a similar percentage of TAPS.<a style='mso-footnote-id:ftn4' href="#_ftn4" name="_ftnref4" title=""><span class=MsoFootnoteReference><span style='mso-special-character:footnote'><![if !supportFootnotes]>[4]<![endif]></span></span></a></span><span style="mso-spacerun: yes">   </span><span style='font-weight:normal;font-style: normal'>Over the first 22 years of operation, it is estimated that North Slope production and TAPS earned profits an estimated $73.4 billion for investors.<a style='mso-footnote-id:ftn5' href="#_ftn5" name="_ftnref5" title=""><span class=MsoFootnoteReference><span style='mso-special-character:footnote'><![if !supportFootnotes]>[5]<![endif]></span></span></a><span style="mso-spacerun: yes">  </span>By comparison, the state of Alaska and the federal government received $97.6 billion dollars during the same period.<a style='mso-footnote-id:ftn6' href="#_ftn6" name="_ftnref6" title=""><span class=MsoFootnoteReference><span style='mso-special-character:footnote'><![if !supportFootnotes]>[6]<![endif]></span></span></a><span style="mso-spacerun: yes">  </span><o:p></o:p></span></p> <p class=MsoNormal style='text-indent:.5in;line-height:150%'><b><i><u>The Regulatory Commission of Alaska s 2002 TAPS Decision</u></i></b><i><u>.</u></i><span style="mso-spacerun: yes">  </span>Between 1977 and 1998, TAPS generated approximately $19.3 billion of the industry s profits from North Slope production and pipeline operations <b><i> </i></b> approximately 26.3% of the industry s total profits from Alaska s North Slope.<a style='mso-footnote-id: ftn7' href="#_ftn7" name="_ftnref7" title=""><span class=MsoFootnoteReference><span style='mso-special-character:footnote'><![if !supportFootnotes]>[7]<![endif]></span></span></a><span style="mso-spacerun: yes">   </span>But this figure only hints at the economic importance of the pipeline.<span style="mso-spacerun: yes">  </span>In November 2002, the Regulatory Commission of Alaska (RCA), a quasi-independent state agency that regulates pipeline shipping charges for the small portion of TAPS oil destined for in-state markets,<a style='mso-footnote-id:ftn8' href="#_ftn8" name="_ftnref8" title=""><span class=MsoFootnoteReference><span style='mso-special-character:footnote'><![if !supportFootnotes]>[8]<![endif]></span></span></a> issued an order summarizing the results of an extensive investigation of the tariffs on TAPS.<span style="mso-spacerun: yes">  </span>The 465-page decision found that the pipeline operators had been overcharging pipeline shippers by gross amounts since TAPS entered service.<a style='mso-footnote-id:ftn9' href="#_ftn9" name="_ftnref9" title=""><span class=MsoFootnoteReference><span style='mso-special-character:footnote'><![if !supportFootnotes]>[9]<![endif]></span></span></a><span style="mso-spacerun: yes">  </span>Data in the order indicate that, overall, TAPS tariff overcharges reduced state revenues by over $2.0 billion between 1977 and 1996.<span style="mso-spacerun: yes">  </span>For all practical purposes, that money is lost to public coffers.<span style="mso-spacerun: yes">  </span>But the RCA decision was far from academic.<span style="mso-spacerun: yes">  </span>The operational part of the RCA decision deals with more recent tariffs.<span style="mso-spacerun: yes">  </span>The commission concluded that in relation to costs, shipping charges on the pipeline in recent years have been, on average, 57 percent too high.<span style="mso-spacerun: yes">  </span>Therefore, the state commission ordered those tariffs reduced for the oil over which it exercises jurisdiction.<a style='mso-footnote-id:ftn10' href="#_ftn10" name="_ftnref10" title=""><span class=MsoFootnoteReference><span style='mso-special-character:footnote'><![if !supportFootnotes]>[10]<![endif]></span></span></a><span style="mso-spacerun: yes">  </span></p> <p class=MsoNormal style='text-indent:.5in;line-height:150%'><![if !supportEmptyParas]>&nbsp;<![endif]><o:p></o:p></p> <p class=MsoNormal style='text-indent:.5in;line-height:150%'>The primary reason pipelines are regulated is that they are a potential bottleneck that can be used to strangle competition, either by charging excessive rates or by limiting access.<span style="mso-spacerun: yes">  </span>For the TAPS owners, tariffs charges are internal transfer payments, typically made by the firm s producing arm to its transportation unit. On the other hand, non-owners must pay shipping charges  including a profit allowance -- out of their own pockets.<span style="mso-spacerun: yes">  </span>Perhaps it is not surprising, therefore, that the RCA decision sent ripples through the Alaska oil and gas community.<span style="mso-spacerun: yes">   </span>The Division of Oil &amp; Gas of the Alaska Department of Natural Resources (the state s land manager) has estimated that reduced tariffs on TAPS  if applied line-wide  would increase state revenues by $110 million per year. At present, the TAPS Owners are pocketing the excess revenue they collect on TAPS.<a style='mso-footnote-id:ftn11' href="#_ftn11" name="_ftnref11" title=""><span class=MsoFootnoteReference><span style='mso-special-character:footnote'><![if !supportFootnotes]>[11]<![endif]></span></span></a><span style="mso-spacerun: yes">   </span>But assuring a fair share of the petroleum revenue  take is just one of the important public policy reasons for seeking tariff reductions.<span style="mso-spacerun: yes">  </span>The second reason is this:<span style="mso-spacerun: yes">  </span>Excessive pipeline tariffs penalize prospective producers and inhibit the competition on which future oil development depends.<span style="mso-spacerun: yes">  </span>According to the director of the Oil and Gas Division,<i> </i> [e]xcessive tariffs create a barrier to entry for all oil and gas companies not owning an interest in TAPS. <i> </i><span style="mso-spacerun: yes"> </span>In January 2003, a trade journal survey of 17 key industry participants and observers found that lower TAPS tariffs tied for first place as the top priority for 2003 (with streamlined permitting) and  one of the most important incentives the state could offer. <a style='mso-footnote-id:ftn12' href="#_ftn12" name="_ftnref12" title=""><span class=MsoFootnoteReference><span style='mso-special-character:footnote'><![if !supportFootnotes]>[12]<![endif]></span></span></a> In February 2003, the Alaska Permanent Fund Board of Trustees voted to investigate  all maintenance and operational practices, including tariff and facility pricing, that could limit development of state oil leases.<a style='mso-footnote-id:ftn13' href="#_ftn13" name="_ftnref13" title=""><span class=MsoFootnoteReference><span style='mso-special-character:footnote'><![if !supportFootnotes]>[13]<![endif]></span></span></a><span style="mso-spacerun: yes">    </span>The TAPS owners have challenged the RCA ruling  and its jurisdiction  in the state legislature and in court.<a style='mso-footnote-id:ftn14' href="#_ftn14" name="_ftnref14" title=""><span class=MsoFootnoteReference><span style='mso-special-character:footnote'><![if !supportFootnotes]>[14]<![endif]></span></span></a><span style="mso-spacerun: yes">  </span></p> <p class=MsoNormal><![if !supportEmptyParas]>&nbsp;<![endif]><o:p></o:p></p> <p class=MsoNormal style='text-indent:.5in;line-height:150%'><b><i><u>Conoco s Experience.</u></i></b><span style="mso-spacerun: yes">  </span>The importance of pipeline ownership is demonstrated by the experience of Conoco,<a style='mso-footnote-id:ftn15' href="#_ftn15" name="_ftnref15" title=""><span class=MsoFootnoteReference><span style='mso-special-character:footnote'><![if !supportFootnotes]>[15]<![endif]></span></span></a> the former operator of the North Slope s Milne Point field.<span style="mso-spacerun: yes">  </span>Conoco was the only company that has operated a field on the North Slope without a share of the super-giant Prudhoe Bay or TAPS.<span style="mso-spacerun: yes">  </span>During a period of relatively low oil prices in 1993, Conoco sold its North Slope interests to BP.<span style="mso-spacerun: yes">  </span>Analysis of North Slope production and pipeline revenue streams reveals that the guaranteed profits from TAPS ownership might have kept the operation afloat until oil prices rose again.<a style='mso-footnote-id:ftn16' href="#_ftn16" name="_ftnref16" title=""><span class=MsoFootnoteReference><span style='mso-special-character:footnote'><![if !supportFootnotes]>[16]<![endif]></span></span></a> Later, reflecting on his company s departure from Alaska, Conoco Chairman and CEO Archie Dunham said,  It broke my heart to trade Milne Point, but we had to do it. All the value of that property was taken away from us in the pipeline tariffs. It was a valuable strategic lesson just look at why the producers in the Caspian Sea are so worried. <a style='mso-footnote-id:ftn17' href="#_ftn17" name="_ftnref17" title=""><span class=MsoFootnoteReference><span style='mso-special-character:footnote'><![if !supportFootnotes]>[17]<![endif]></span></span></a><span style="mso-spacerun: yes">  </span>By virtue of the mergers among major oil companies (see footnote 3, above), ConocoPhillips is now a major TAPS owner.<span style="mso-spacerun: yes">  </span>In addition to joining a vigorous defense of the TAPS tariff in a court challenge to the recent RCA decision,<a style='mso-footnote-id:ftn18' href="#_ftn18" name="_ftnref18" title=""><span class=MsoFootnoteReference><span style='mso-special-character: footnote'><![if !supportFootnotes]>[18]<![endif]></span></span></a> ConocoPhillips has proposed legislation to limit the authority of the RCA.<a style='mso-footnote-id:ftn19' href="#_ftn19" name="_ftnref19" title=""><span class=MsoFootnoteReference><span style='mso-special-character:footnote'><![if !supportFootnotes]>[19]<![endif]></span></span></a></p> <p class=MsoNormal style='line-height:150%'><![if !supportEmptyParas]>&nbsp;<![endif]><o:p></o:p></p> <p class=MsoNormal style='text-indent:.5in;line-height:150%'><b><i><u>The Devil Is in the Details.</u></i><span style="mso-spacerun: yes">  </span></b>The RCA decision also served notice that the commission intends to deal with another tariff issue of enormous fiscal and public policy importance:<span style="mso-spacerun: yes">  </span>the provisions governing TAPS dismantling, removal and restoration (DR&amp;R).<a style='mso-footnote-id:ftn20' href="#_ftn20" name="_ftnref20" title=""><span class=MsoFootnoteReference><span style='mso-special-character:footnote'><![if !supportFootnotes]>[20]<![endif]></span></span></a><span style="mso-spacerun: yes">  </span>In recent orders, the RCA has reconfirmed its commitment to exercise its jurisdiction over DR&amp;R issues under state law.<a style='mso-footnote-id:ftn21' href="#_ftn21" name="_ftnref21" title=""><span class=MsoFootnoteReference><span style='mso-special-character:footnote'><![if !supportFootnotes]>[21]<![endif]></span></span></a><span style="mso-spacerun: yes">   </span>At issue is the industry s accelerated or front-loaded collection and retention of approximately $1.6 billion in funds for the future dismantling of the pipeline.<span style="mso-spacerun: yes">  </span>This tariff element is an undeserved windfall to the TAPS owners of enormous proportions, delivered to the TAPS Owners at shipper and public expense.<span style="mso-spacerun: yes">  </span>The Staff Expert Witness for the Alaska Public Utilities Commission, predecessor to the RCA, first identified the financial benefits of the DR&amp;R provision to the TAPS owners, as well as the policy consequences for the State of Alaska, in 1986.<a style='mso-footnote-id:ftn22' href="#_ftn22" name="_ftnref22" title=""><span class=MsoFootnoteReference><span style='mso-special-character:footnote'><![if !supportFootnotes]>[22]<![endif]></span></span></a><span style="mso-spacerun: yes">   </span>Since then, DR&amp;R problems have come to public attention at least four times; in every instance, the state administration has failed to remedy the problem, thereby continuing to penalize the state treasury and place the environment at potential risk.<a style='mso-footnote-id:ftn23' href="#_ftn23" name="_ftnref23" title=""><span class=MsoFootnoteReference><span style='mso-special-character:footnote'><![if !supportFootnotes]>[23]<![endif]></span></span></a><span style="mso-spacerun: yes">  </span></p> <p class=MsoNormal style='line-height:150%'><span style='font-size:8.0pt; mso-bidi-font-size:12.0pt'><![if !supportEmptyParas]>&nbsp;<![endif]><o:p></o:p></span></p> <p class=MsoNormal style='text-indent:.5in;line-height:150%'>While the DR&amp;R provision has major implications for public policy in Alaska, it is a relatively minor aspect of the TAPS DR&amp;R terms that best illustrates the complicated nature of pipeline tariff issues -- and the potential for industry to profit from the complexity surrounding transportation costs at public expense.<span style="mso-spacerun: yes">  </span>The TAPS tariff formula allows the TAPS owners to collect from shippers an income tax surcharge on all DR&amp;R payments as part of the tariff.<span style="mso-spacerun: yes">  </span>But instead of actually making those payments to the federal Internal Revenue Service (IRS), the pipeline owners obtained a special ruling allowing annual deductions on DR&amp;R income  long before that money is actually spent on dismantling.<span style="mso-spacerun: yes">  </span>For the TAPS owner shipping its own oil, the unnecessary income tax collection is simply a transfer to from the company s production arm to its transportation subsidiary.<span style="mso-spacerun: yes">  </span>But this phantom transportation cost penalizes non-owner shippers, who must pay the cost out of pocket under the tariff formula.<span style="mso-spacerun: yes">  </span>Moreover, the excess cost also reduces the production arm s royalty and severance tax basis, saving the company  and costing the state -- an estimated $0.21 per dollar.<a style='mso-footnote-id:ftn24' href="#_ftn24" name="_ftnref24" title=""><span class=MsoFootnoteReference><span style='mso-special-character:footnote'><![if !supportFootnotes]>[24]<![endif]></span></span></a><span style="mso-spacerun: yes">   </span>Three years ago, a committee of the Alaska State Legislature tried to find out how money much the state has lost over the years as a result of this scam.<span style="mso-spacerun: yes">  </span>The legislative committee was unsuccessful.<a style='mso-footnote-id:ftn25' href="#_ftn25" name="_ftnref25" title=""><span class=MsoFootnoteReference><span style='mso-special-character:footnote'><![if !supportFootnotes]>[25]<![endif]></span></span></a><span style="mso-spacerun: yes">  </span></p> <p class=MsoNormal style='line-height:150%'><span style='mso-tab-count:1'>                        </span>What about using pipeline facilities to limit access to the North Slope oil trade?<span style="mso-spacerun: yes">  </span>In 1993, U.S. Oil, a small oil company with a refinery on the West Coast decided that it could obtain oil from the North Slope more cheaply by chartering its own tanker than by paying BP to deliver that oil. By offering cheaper tanker rates than the major North Slope producers, U.S. oil planned to fill its tanker with oil for other refineries.<span style="mso-spacerun: yes">  </span>The tanker would have been the only tanker calling at the Valdez terminal to pick up North Slope oil that was not under the control of the major North Slope producers.<span style="mso-spacerun: yes">  </span>The TAPS operators denied the U.S. Oil tanker from Valdez, claiming that the company lacked the financial resources required by law to provide adequate spill response.<span style="mso-spacerun: yes">  </span>Barred from competing in the TAPS trade, the tanker owners filed two lawsuits  a suit against TAPS in state court for breach of contract and an antitrust case against the pipeline company and its owners in federal court.<span style="mso-spacerun: yes">   </span>After a three-week trial in 1998, the state court concluded that the TAPS operators had imposed unreasonable financial requirements beyond those required by law, causing the tanker s owners to lose more than $10 million dollars.<span style="mso-spacerun: yes">  </span>Armed with that court judgment, the tanker owners negotiated a settlement with the pipeline company and dropped their antitrust case.<a style='mso-footnote-id: ftn26' href="#_ftn26" name="_ftnref26" title=""><span class=MsoFootnoteReference><span style='mso-special-character:footnote'><![if !supportFootnotes]>[26]<![endif]></span></span></a><span style="mso-spacerun: yes">  </span>Attorneys for the barred tanker could not discuss details but said they were happy with their settlement.<a style='mso-footnote-id:ftn27' href="#_ftn27" name="_ftnref27" title=""><span class=MsoFootnoteReference><span style='mso-special-character:footnote'><![if !supportFootnotes]>[27]<![endif]></span></span></a><span style="mso-spacerun: yes">  </span>However, the facts laid out in the court documents strongly suggest that the TAPS owners used their control of their facilities to bar a competing tanker from the TAPS trade.</p> <p class=MsoNormal style='text-indent:.5in;line-height:150%'><b><i><u>The State s Response to the RCA Decision.</u></i></b><span style="mso-spacerun: yes">  </span>You might think that the state of Alaska would be vigilant to ensure robust competition and promote development and increase revenues by preventing excessive pipeline tariffs and ensuring open access to key transportation facilities.<span style="mso-spacerun: yes">  </span>But you would be surprised.<span style="mso-spacerun: yes">  </span>Strange as it may seem, when Oilwatch Alaska, a nongovernmental organization, raised these issues with Alaska s Attorney General, he responded that none of the parties allegedly injured by the conduct of the major North Slope producers has ever raised his concerns with the Department of Law.<a style='mso-footnote-id:ftn28' href="#_ftn28" name="_ftnref28" title=""><span class=MsoFootnoteReference><span style='mso-special-character:footnote'><![if !supportFootnotes]>[28]<![endif]></span></span></a><span style="mso-spacerun: yes">  </span></p> <p class=MsoNormal style='text-indent:.5in;line-height:150%'>Although the state Division of Oil and Gas has recently pointed out the problems resulting from the TAPS settlement methodology, it is the Department of Law that exercises primary responsibility for state pipeline tariff policy.<span style="mso-spacerun: yes">  </span>It should be noted that it was the Department of Law s attorneys who negotiated the 1985 settlement agreement between the state and the TAPS owners.<a style='mso-footnote-id:ftn29' href="#_ftn29" name="_ftnref29" title=""><span class=MsoFootnoteReference><span style='mso-special-character:footnote'><![if !supportFootnotes]>[29]<![endif]></span></span></a><span style="mso-spacerun: yes">   </span>Participants in settlement negotiations are likely to believe it is a good one, whatever the outcome; if the negotiators didn t think the settlement was the best possible under the circumstances, they would continue to negotiate or litigate.<span style="mso-spacerun: yes">   </span>This may be one reason why Alaska s policy makers do not seek immediate reduction of TAPS tariffs<a style='mso-footnote-id:ftn30' href="#_ftn30" name="_ftnref30" title=""><span class=MsoFootnoteReference><span style='mso-special-character:footnote'><![if !supportFootnotes]>[30]<![endif]></span></span></a> and do not try to get to the bottom of the DR&amp;R question.<span style="mso-spacerun: yes">  </span>To do so would be to criticize their own 1985 settlement agreement.<span style="mso-spacerun: yes">  </span>When the Department of Law s settlement defense fails on the merits, the state s attorneys resist challenges by relying rely on a provision of the settlement that obligates all signatories to defend the settlement.<a style='mso-footnote-id: ftn31' href="#_ftn31" name="_ftnref31" title=""><span class=MsoFootnoteReference><span style='mso-special-character:footnote'><![if !supportFootnotes]>[31]<![endif]></span></span></a> </p> <p class=MsoNormal style='text-indent:.5in;line-height:150%'><![if !supportEmptyParas]>&nbsp;<![endif]><o:p></o:p></p> <p class=MsoNormal style='text-indent:.5in;line-height:150%'>In 2001, the Alaska Department of Law claimed that the 1985 settlement resulted in tariff reductions resulting from that settlement augmented state revenues by $3.8 billion during the next 10 years.<a style='mso-footnote-id:ftn32' href="#_ftn32" name="_ftnref32" title=""><span class=MsoFootnoteReference><span style='mso-special-character:footnote'><![if !supportFootnotes]>[32]<![endif]></span></span></a><span style="mso-spacerun: yes">  </span>This figure should not be mistaken for demonstration that the settlement served the public interest; that argument turns the excessive tariffs filed by the TAPS owners into a reference point, then substitutes that faulty benchmark for the standard of just and reasonable tariffs.<span style="mso-spacerun: yes">  </span>But the rationale for high tariffs offered by attorneys obligated to advocate the interests of their company s stockholders is not the appropriate standard for evaluating the settlement tariffs.<span style="mso-spacerun: yes">  </span>Rather, tariffs should be evaluated in terms of factors such as actual costs and appropriate rates of return for risks incurred.<span style="mso-spacerun: yes">  </span>It is the latter approach that the RCA correctly applied when it determined that TAPS tariffs were  and are  grossly excessive.<span style="mso-spacerun: yes">     </span></p> <p class=MsoBodyTextIndent>The lessons from TAPS and Alaska s North Slope may be summarized as follows:<span style="mso-spacerun: yes">  </span></p> <p class=MsoBodyTextIndent><span style='font-family:Wingdings;mso-ascii-font-family: "Times New Roman";mso-hansi-font-family:"Times New Roman";mso-char-type:symbol; mso-symbol-font-family:Wingdings'><span style='mso-char-type:symbol;mso-symbol-font-family: Wingdings'>è</span></span> Excess transportation costs from a remote province can reduce host government revenues significantly; </p> <p class=MsoBodyTextIndent><span style='font-family:Wingdings;mso-ascii-font-family: "Times New Roman";mso-hansi-font-family:"Times New Roman";mso-char-type:symbol; mso-symbol-font-family:Wingdings'><span style='mso-char-type:symbol;mso-symbol-font-family: Wingdings'>è</span></span> high costs and selective enforcement of transportation terms can also inhibit competition by companies who do not share in pipeline ownership; </p> <p class=MsoBodyTextIndent><span style='font-family:Wingdings;mso-ascii-font-family: "Times New Roman";mso-hansi-font-family:"Times New Roman";mso-char-type:symbol; mso-symbol-font-family:Wingdings'><span style='mso-char-type:symbol;mso-symbol-font-family: Wingdings'>è</span></span> calculation of transportation costs and their implications for host government revenues are liable to be quite complicated; </p> <p class=MsoBodyTextIndent><span style='font-family:Wingdings;mso-ascii-font-family: "Times New Roman";mso-hansi-font-family:"Times New Roman";mso-char-type:symbol; mso-symbol-font-family:Wingdings'><span style='mso-char-type:symbol;mso-symbol-font-family: Wingdings'>è</span></span> state actions in this arena have not maximized the public interest.</p> <p class=MsoBodyTextIndent style='text-indent:0in'>In this situation, an informed public can play an important role by encouraging government to avoid problems or demanding that mistakes be corrected.<span style="mso-spacerun: yes">  </span></p> <p class=MsoNormal style='text-indent:.5in;line-height:150%'><![if !supportEmptyParas]>&nbsp;<![endif]><o:p></o:p></p> <h4>Caspian Basin</h4> <p class=MsoNormal style='line-height:150%'><span style='mso-tab-count:1'>                        </span>Oil exports from the Caspian Sea region totaled approximately 0.92 million bpd in 2001.<span style="mso-spacerun: yes">  </span>This figure is expected to triple by 2010.<span style="mso-spacerun: yes">  </span>Much of that oil will likely be carried by two major new oil pipelines that will carry Caspian oil to western markets.<span style="mso-spacerun: yes">  </span>In October 2001, the Caspian Pipeline Consortium (CPC) Pipeline loaded its first barrel of Kazakhstan oil into a tanker at the Black Sea port of Novorossiisk, Russia.<span style="mso-spacerun: yes">  </span>The CPC line, which circles the north rim of the Caspian Sea on its 1,580-kilometer trip to the Black Sea, will serve as the principal conduit for the super-giant Tengiz field in western Kazakhstan.<span style="mso-spacerun: yes">  </span>A second major line, the Baku-Tbilisi-Ceyhan (BTC) Pipeline, is presently under construction.<span style="mso-spacerun: yes">  </span>When completed, the 1,738-kilometer BTC Pipeline will carry oil from another super-giant field, Azerbaijan s Azeri-Chirag-Gunashli complex in the southern Caspian Sea through Georgia to Ceyhan, Turkey, on the Mediterranean.<span style="mso-spacerun: yes">    </span>A third super-giant field, Kashagan, was discovered in the northern Caspian, just west of Tengiz, in 2000.<span style="mso-spacerun: yes">  </span>Oil from that field might be shipped on either new pipeline, or both.<span style="mso-spacerun: yes">   </span>Meanwhile, smaller but significant quantities of oil produced in other Kazakhstan oil provinces are now transported via other truck, rail, barge and pipeline connections.<span style="mso-spacerun: yes">  </span>The most important of these is a network of older pipelines that transports oil north to Russia.<span style="mso-spacerun: yes">  </span>Some of this oil may use excess capacity in the BTC and CPC pipelines.<span style="mso-spacerun: yes">  </span>Additionally, construction is underway on a new pipeline that will carry Kazakhstan oil east to China.<span style="mso-spacerun: yes">  </span>Export through Iran would provide an attractive economic alternative, but a major impetus for Caspian oil development is to reduce western dependence on the Persian Gulf states.<a style='mso-footnote-id:ftn33' href="#_ftn33" name="_ftnref33" title=""><span class=MsoFootnoteReference><span style='mso-special-character:footnote'><![if !supportFootnotes]>[33]<![endif]></span></span></a></p> <p class=MsoNormal style='text-indent:.5in;line-height:150%'><b><i><u>The Chicken-Egg Dilemma: Part I.</u></i></b><span style="mso-spacerun: yes">  </span>It has been suggested that large pipelines face a classic  chicken and egg problem:<span style="mso-spacerun: yes">  </span>An oil field needs a transportation link, but a pipeline needs oil.<span style="mso-spacerun: yes">  </span>Investors in the component that is completed first faces a risk of economic loss if the latter fails to be completed on schedule or fails to live up to expectations.<a style='mso-footnote-id:ftn34' href="#_ftn34" name="_ftnref34" title=""><span class=MsoFootnoteReference><span style='mso-special-character:footnote'><![if !supportFootnotes]>[34]<![endif]></span></span></a><span style="mso-spacerun: yes">  </span>It is difficult to establish the correct rate of payment for shipments on a pipeline with an uncertain future.<span style="mso-spacerun: yes">  </span>Thus, the  chicken and egg dilemma was a significant factor delaying the construction of the CPC Pipeline.<span style="mso-spacerun: yes">  </span>In 1993, it was estimated that the CPC line would cost $1.4 billion.<span style="mso-spacerun: yes">  </span>Chevron (now ChevronTexaco) held a major interest in Tengiz and thus had a primary interest in the pipeline to the west.<span style="mso-spacerun: yes">  </span>But the financing proved difficult to arrange and construction did not begin immediately.<span style="mso-spacerun: yes">  </span>By the time the financing to build the pipeline was arranged and construction began five years later, the consortium had no less than eleven identified participants.<span style="mso-spacerun: yes">  </span>With a capacity of 400,000 bpd in 2002, an additional $1.7 billion investment is planned to increase CPC s capacity to 1.34 million bpd by 2015.<a style='mso-footnote-id:ftn35' href="#_ftn35" name="_ftnref35" title=""><span class=MsoFootnoteReference><span style='mso-special-character:footnote'><![if !supportFootnotes]>[35]<![endif]></span></span></a><span style="mso-spacerun: yes">  </span></p> <p class=MsoNormal style='text-indent:.5in;line-height:150%'>Three governments own 50 percent of CPC, while eight private investing groups comprised the other half.<span style="mso-spacerun: yes">  </span>The present owners of Tengiz and the CPC pipeline are:</p> <p class=MsoNormal style='text-indent:.5in;line-height:150%'><span style='font-size:8.0pt;mso-bidi-font-size:12.0pt'><![if !supportEmptyParas]>&nbsp;<![endif]><o:p></o:p></span></p> <p class=MsoNormal style='text-indent:.5in;line-height:150%'><span style='font-size:4.0pt;mso-bidi-font-size:12.0pt'><![if !supportEmptyParas]>&nbsp;<![endif]><o:p></o:p></span></p> <p class=MsoNormal style='line-height:150%;tab-stops:3.0in'><b><u>Table 1.<span style="mso-spacerun: yes">  </span>Tengiz and <span style="mso-spacerun: yes"> </span>CPC Pipeline Project<o:p></o:p></u></b></p> <table border=1 cellspacing=0 cellpadding=0 width=590 style='width:6.15in; border-collapse:collapse;border:none;mso-border-alt:solid windowtext .5pt; mso-padding-alt:0in 5.4pt 0in 5.4pt'> <tr> <td width=295 valign=top style='width:221.4pt;border:solid windowtext .5pt; padding:0in 5.4pt 0in 5.4pt'> <h5 align=left style='text-align:left'>Tengiz</h5> </td> <td width=295 valign=top style='width:221.4pt;border:solid windowtext .5pt; border-left:none;mso-border-left-alt:solid windowtext .5pt;padding:0in 5.4pt 0in 5.4pt'> <p class=MsoNormal style='margin-left:1.0in;tab-stops:3.0in'><b><u><span style='font-size:11.0pt;mso-bidi-font-size:12.0pt'>CPC Pipeline<o:p></o:p></span></u></b></p> </td> </tr> <tr> <td width=295 valign=top style='width:221.4pt;border:solid windowtext .5pt; border-top:none;mso-border-top-alt:solid windowtext .5pt;padding:0in 5.4pt 0in 5.4pt'> <p class=MsoNormal style='tab-stops:3.0in'><i><span style='font-size:10.0pt; mso-bidi-font-size:12.0pt'>Estimated 9 billion barrel recoverable, discovered in 1979; production in 2001, 290,000 bpd; anticipated peak of approximately 0.9<span style="mso-spacerun: yes">  </span>million bpd around 2010.<o:p></o:p></span></i></p> <p class=MsoNormal style='tab-stops:3.0in'><![if !supportEmptyParas]>&nbsp;<![endif]><b><u><span style='font-size:11.0pt;mso-bidi-font-size:12.0pt'><o:p></o:p></span></u></b></p> </td> <td width=295 valign=top style='width:221.4pt;border-top:none;border-left: none;border-bottom:solid windowtext .5pt;border-right:solid windowtext .5pt; mso-border-top-alt:solid windowtext .5pt;mso-border-left-alt:solid windowtext .5pt; padding:0in 5.4pt 0in 5.4pt'> <p class=MsoNormal style='tab-stops:3.0in'><i><span style='font-size:10.0pt; mso-bidi-font-size:12.0pt'>From Tengiz to Novorrossiisk; first phase completed 2001; present capacity 600,000 bpd; when completed, will carry 1.34 million bpd for a total cost of $4.2 billion</span></i><span style='font-size:10.0pt;mso-bidi-font-size:12.0pt'><span style="mso-spacerun: yes">  </span><i><span style='mso-tab-count:1'>                                                </span></i><span style="mso-spacerun: yes"> </span></span><b><u><span style='font-size:11.0pt; mso-bidi-font-size:12.0pt'><o:p></o:p></span></u></b></p> </td> </tr> <tr> <td width=295 valign=top style='width:221.4pt;border:solid windowtext .5pt; border-top:none;mso-border-top-alt:solid windowtext .5pt;padding:0in 5.4pt 0in 5.4pt'> <p class=MsoNormal style='tab-stops:3.0in'><i><u><span style='font-size:10.0pt; mso-bidi-font-size:12.0pt'>Owners:</span></u></i><b><u><span style='font-size:11.0pt;mso-bidi-font-size:12.0pt'><o:p></o:p></span></u></b></p> </td> <td width=295 valign=top style='width:221.4pt;border-top:none;border-left: none;border-bottom:solid windowtext .5pt;border-right:solid windowtext .5pt; mso-border-top-alt:solid windowtext .5pt;mso-border-left-alt:solid windowtext .5pt; padding:0in 5.4pt 0in 5.4pt'> <p class=MsoNormal style='tab-stops:3.0in'><i><u><span style='font-size:10.0pt; mso-bidi-font-size:12.0pt'>Owners:</span></u></i><b><u><span style='font-size:11.0pt;mso-bidi-font-size:12.0pt'><o:p></o:p></span></u></b></p> </td> </tr> <tr> <td width=295 valign=top style='width:221.4pt;border:solid windowtext .5pt; border-top:none;mso-border-top-alt:solid windowtext .5pt;padding:0in 5.4pt 0in 5.4pt'> <p class=MsoFootnoteText style='tab-stops:3.0in'><span style='mso-bidi-font-size: 12.0pt'><![if !supportEmptyParas]>&nbsp;<![endif]><o:p></o:p></span></p> <p class=MsoFootnoteText style='tab-stops:3.0in'><span style='mso-bidi-font-size: 12.0pt'><![if !supportEmptyParas]>&nbsp;<![endif]><o:p></o:p></span></p> <p class=MsoFootnoteText style='tab-stops:3.0in'><span style='mso-bidi-font-size: 12.0pt'><![if !supportEmptyParas]>&nbsp;<![endif]><o:p></o:p></span></p> <p class=MsoFootnoteText style='tab-stops:right 2.75in left 207.0pt dotted 3.0in'><span style='mso-bidi-font-size:12.0pt'>ChevronTexaco (50%) . . . . . . . . . . . . . . . . . . . . . . . <br> </span>ExxonMobil (25%)<span style='mso-bidi-font-size:12.0pt'> . . . . . . . . . . . . . . . . . . . . . . . . . . </span></p> <p class=MsoFootnoteText style='tab-stops:3.0in'>Kazakhoil (20%) <span style='mso-bidi-font-size:12.0pt'><span style="mso-spacerun: yes"> </span></span></p> <p class=MsoFootnoteText style='tab-stops:3.0in'>LUKArco (5%)<span style='mso-bidi-font-size:12.0pt'> . . . . . . . . . . . . . . . . . . . . . . . . . . . . . <b><u><o:p></o:p></u></b></span></p> </td> <td width=295 valign=top style='width:221.4pt;border-top:none;border-left: none;border-bottom:solid windowtext .5pt;border-right:solid windowtext .5pt; mso-border-top-alt:solid windowtext .5pt;mso-border-left-alt:solid windowtext .5pt; padding:0in 5.4pt 0in 5.4pt'> <p class=MsoBodyText3 style='tab-stops:3.0in'><span style='mso-bidi-font-size: 12.0pt'>Russian Federation (24%)<o:p></o:p></span></p> <p class=MsoNormal style='tab-stops:3.0in'><span style='font-size:10.0pt; mso-bidi-font-size:12.0pt'>Republic of Kazakhstan (19%)<o:p></o:p></span></p> <p class=MsoNormal style='tab-stops:3.0in'><span style='font-size:10.0pt; mso-bidi-font-size:12.0pt'>Sultanate of Oman (7%)<o:p></o:p></span></p> <p class=MsoFootnoteText style='tab-stops:3.0in'><span style='mso-bidi-font-size: 12.0pt'>Chevron CPC Consortium (15%)</span> </p> <p class=MsoFootnoteText style='tab-stops:3.0in'>ExxonMobil (7.5%) </p> <p class=MsoFootnoteText style='tab-stops:3.0in'><![if !supportEmptyParas]>&nbsp;<![endif]><o:p></o:p></p> <p class=MsoFootnoteText style='tab-stops:3.0in'>LUKArco (12.5%) </p> <p class=MsoFootnoteText style='tab-stops:3.0in'>Kazakhstan Pipeline Ventures LLC (1.75%) Rosneft-Shell Caspian Vent. (7.5%)</p> <p class=MsoFootnoteText style='tab-stops:3.0in'>Agip International (2%)</p> <p class=MsoFootnoteText style='tab-stops:3.0in'>BG Overseas Holdings (2%)</p> <p class=MsoFootnoteText style='tab-stops:3.0in'>Oryx Caspian Pipeline Co. (1.75%)</p> <p class=MsoFootnoteText style='tab-stops:3.0in'><![if !supportEmptyParas]>&nbsp;<![endif]><b><u><span style='font-size:11.0pt;mso-bidi-font-size:12.0pt'><o:p></o:p></span></u></b></p> </td> </tr> <tr> <td width=590 colspan=2 valign=top style='width:6.15in;border:solid windowtext .5pt; border-top:none;mso-border-top-alt:solid windowtext .5pt;padding:0in 5.4pt 0in 5.4pt'> <p class=MsoBodyText3 style='tab-stops:3.0in'><span style='font-size:8.0pt; mso-bidi-font-size:12.0pt'><span style="mso-spacerun: yes"> </span>(From:<span style="mso-spacerun: yes">  </span></span><span style='font-size:8.0pt;mso-bidi-font-size:10.0pt'>U.S. Energy Information Agency,  Kazakhstan (country briefing report), January 2002 and<span style="mso-spacerun: yes">  </span> Caspian Sea Region:<span style="mso-spacerun: yes">  </span>Reserves and Pipeline Tables, July 2002, Tables 1, 2 and 4.)</span><span style='mso-bidi-font-size:12.0pt'><o:p></o:p></span></p> </td> </tr> </table> <p class=MsoNormal style='tab-stops:3.0in'><span style='font-size:11.0pt; mso-bidi-font-size:12.0pt'><span style='mso-tab-count:1'>                                                                        </span></span><span style='font-size:4.0pt;mso-bidi-font-size:12.0pt'><o:p></o:p></span></p> <p class=MsoBodyText3 style='tab-stops:3.0in'><span style='mso-bidi-font-size: 12.0pt'><![if !supportEmptyParas]>&nbsp;<![endif]><o:p></o:p></span></p> <p class=MsoBodyText3 style='text-indent:.5in;line-height:150%;tab-stops:3.0in'><span style='font-size:12.0pt;mso-bidi-font-size:10.0pt'>Although its name does not appear in the preceding list, BP  the major British transnational whose interests on Alaska s North Slope were discussed in the preceding section  owns approximately 6.62% of the CPC pipeline.<span style="mso-spacerun: yes">  </span>When BP acquired ARCO in 2000, BP inherited ARCO s interests in LUKArco, a joint venture with the Russian oil company Lukoil formed in 1997.<span style="mso-spacerun: yes">   </span>As a result of that merger, BP has a 5.75% share of CPC (46% of LUKArco s 12.5% stake), with an obligation to finance 25% of the pipeline.<a style='mso-footnote-id:ftn36' href="#_ftn36" name="_ftnref36" title=""><span class=MsoFootnoteReference><span style='mso-special-character: footnote'><![if !supportFootnotes]>[36]<![endif]></span></span></a><span style="mso-spacerun: yes">   </span>Press accounts indicate that BP also controls an additional 0.875% of CPC through LUKArco s half interest in Kazakhstan Pipeline Ventures LLC.<a style='mso-footnote-id:ftn37' href="#_ftn37" name="_ftnref37" title=""><span class=MsoFootnoteReference><span style='mso-special-character:footnote'><![if !supportFootnotes]>[37]<![endif]></span></span></a><span style="mso-spacerun: yes">  </span>In December 2000, CPC shareholders named Sergei Gnatchenko as the new General Director of CPC.<span style="mso-spacerun: yes">  </span>According to the company press release,  prior to his appointment Mr. Gnatchenko was the President of LUKArco Services B.V., a joint venture of Lukoil and Arco, a subsidiary of BP-Amoco. <a style='mso-footnote-id:ftn38' href="#_ftn38" name="_ftnref38" title=""><span class=MsoFootnoteReference><span style='mso-special-character:footnote'><![if !supportFootnotes]>[38]<![endif]></span></span></a><span style="mso-spacerun: yes">  </span><o:p></o:p></span></p> <p class=MsoNormal style='text-indent:.5in;line-height:150%'>When Tengiz oil began to fill the CPC pipeline in March 2001, the cost to construct the pipeline had escalated to $2.6 billion. At that point, start-up was delayed again  this time by disagreements with Russian authorities over shipping rates. According to one observer, the dispute revolved around the method of valuing the different types of crude oils that each producer contributed to the pipeline, each of which had a different chemical composition and, consequently, a different market value.<span style="mso-spacerun: yes">  </span>Another warned that the quality bank  the method of assigning different values used in western nations<span style="mso-spacerun: yes">  </span> was new to the Russian energy sector and would be difficult to explain.<span style="mso-spacerun: yes">  </span>Others said that the root of the problem was that Transneft, the Russian state pipeline monopoly, simply viewed CPC line as an unwelcome competitor; still other suggested that Russia delayed the opening of CPC in an effort to compel Kazakhstan to agree not to transport oil through the BTC pipeline later in the decade.<a style='mso-footnote-id:ftn39' href="#_ftn39" name="_ftnref39" title=""><span class=MsoFootnoteReference><span style='mso-special-character:footnote'><![if !supportFootnotes]>[39]<![endif]></span></span></a><span style="mso-spacerun: yes">   </span></p> <p class=MsoNormal style='text-indent:.5in;line-height:150%'>The first shipment of oil on the CPC was delivered to the Black Sea in November 2001, but the difficulties making arrangements to get Kazakhstan s oil to market continued.<span style="mso-spacerun: yes">  </span>In March 2002, it was reported that Russia was preparing to classify a portion of the pipeline as a  natural monopoly, which would make its tariffs subject to review. At the same time, oil companies were challenging new petroleum legislation in the Russian Federation and in Kazakhstan before international tribunals.<a style='mso-footnote-id:ftn40' href="#_ftn40" name="_ftnref40" title=""><span class=MsoFootnoteReference><span style='mso-special-character:footnote'><![if !supportFootnotes]>[40]<![endif]></span></span></a> </p> <p class=MsoNormal style='text-indent:.5in;line-height:150%'><span style='font-size:8.0pt;mso-bidi-font-size:12.0pt'><![if !supportEmptyParas]>&nbsp;<![endif]><o:p></o:p></span></p> <p class=MsoNormal style='text-indent:.5in;line-height:150%'><b><i><u>PetroKazakhstan (Hurricane) and CPC.</u></i></b><span style="mso-spacerun: yes">  </span>PetroKazakhstan (formerly Hurricane Hydrocarbons Ltd.) is a small, vertically integrated Canadian firm that has become one of the largest oil companies in Kazakhstan while remaining focused on production from relatively small on-shore fields in the south-central part of the country.<a style='mso-footnote-id:ftn41' href="#_ftn41" name="_ftnref41" title=""><span class=MsoFootnoteReference><span style='mso-special-character:footnote'><![if !supportFootnotes]>[41]<![endif]></span></span></a><span style="mso-spacerun: yes">  </span>Unlike the major transnational oil companies, PetroKazakhstan does not invest in the large, high-stakes prospects that lie beneath the western part of the country and the Caspian Sea; according to PetroKazakhstan chief executive Bernard Isautier, the Caspian is  a different game  long lead times, massive capital investments and different technology. <a style='mso-footnote-id:ftn42' href="#_ftn42" name="_ftnref42" title=""><span class=MsoFootnoteReference><span style='mso-special-character: footnote'><![if !supportFootnotes]>[42]<![endif]></span></span></a><span style="mso-spacerun: yes">  </span>In its turbulent, six-year history, the company has gone from near-bankruptcy in 1999<a style='mso-footnote-id:ftn43' href="#_ftn43" name="_ftnref43" title=""><span class=MsoFootnoteReference><span style='mso-special-character:footnote'><![if !supportFootnotes]>[43]<![endif]></span></span></a> to one of the largest oil companies in Kazakhstan.<span style="mso-spacerun: yes">   </span>During the first quarter of 2003, PetroKazakhstan s 0.14 million bpd represented a 14 percent increase over the preceding year.<a style='mso-footnote-id:ftn44' href="#_ftn44" name="_ftnref44" title=""><span class=MsoFootnoteReference><span style='mso-special-character:footnote'><![if !supportFootnotes]>[44]<![endif]></span></span></a> </p> <p class=MsoNormal style='text-indent:.5in;line-height:150%'>PetroKazhakstan publishes a great deal of information on its complicated business at its on-line web site.<a style='mso-footnote-id:ftn45' href="#_ftn45" name="_ftnref45" title=""><span class=MsoFootnoteReference><span style='mso-special-character:footnote'><![if !supportFootnotes]>[45]<![endif]></span></span></a><span style="mso-spacerun: yes">  </span>The importance of the costs that PetroKazakhstan incurs to move its oil, using a variety of barge, rail, truck and pipeline connections, is indicated by these data.<span style="mso-spacerun: yes">  </span>During the first three months of 2003, the company reported costs of $8.32 per barrel for the variety of barge, rail, truck and pipeline connections necessary to transport its export oil to market.<a style='mso-footnote-id:ftn46' href="#_ftn46" name="_ftnref46" title=""><span class=MsoFootnoteReference><span style='mso-special-character:footnote'><![if !supportFootnotes]>[46]<![endif]></span></span></a><span style="mso-spacerun: yes">  </span>That amount reduces the revenue PetroKazakhstan receives on its exported oil by 35%.<span style="mso-spacerun: yes">   </span></p> <p class=MsoNormal style='text-indent:.5in;line-height:150%'>The unsuccessful effort of PetroKazakhstan to buy into the CPC pipeline provides insight into the importance of pipeline economics in the Caspian Basin.<span style="mso-spacerun: yes">  </span>In 2001, PetroKazakhstan announced plans to streamline its transportation operations by purchasing one-half of the Kazakh Pipeline Ventures interest in CPC from BP for $100 million.<span style="mso-spacerun: yes">   </span>According to press reports, the deal would give PetroKazakhstan a 0.875% stake in the CPC pipeline and the right to export 64,000 bpd over that line, saving the company  millions of dollars every year in transport costs. <span style="mso-spacerun: yes">    </span>By June 2002, the deal was less than a week away from completion and PetroKazakhstan had already paid BP $40 million.<span style="mso-spacerun: yes">  </span>But at that late date, for reasons that were not clear, the deal was scuttled by Kazakhstan s newly-created oil and gas conglomerate and PetroKazakhstan s CPC partner-to-be, KazMunaiGaz.<a style='mso-footnote-id:ftn47' href="#_ftn47" name="_ftnref47" title=""><span class=MsoFootnoteReference><span style='mso-special-character: footnote'><![if !supportFootnotes]>[47]<![endif]></span></span></a><span style="mso-spacerun: yes">  </span>According to one observer,  BP went through tremendous amounts of work to get letters of credit and every major CPC shareholder went through incredible amounts of work for 11 months to put this through. . . . Then you ve got this ridiculous reversal . . . . There s something that doesn t add up here. <a style='mso-footnote-id:ftn48' href="#_ftn48" name="_ftnref48" title=""><span class=MsoFootnoteReference><span style='mso-special-character:footnote'><![if !supportFootnotes]>[48]<![endif]></span></span></a><span style="mso-spacerun: yes">  </span>PetroKazakhstan spent the next year arranging more costly access to CPC as an independent shipper.<a style='mso-footnote-id:ftn49' href="#_ftn49" name="_ftnref49" title=""><span class=MsoFootnoteReference><span style='mso-special-character:footnote'><![if !supportFootnotes]>[49]<![endif]></span></span></a></p> <p class=MsoNormal style='text-indent:.5in;line-height:150%'>Press reports on PetroKazakhstan s unsuccessful effort to buy into CPC suggests that investors in the CPC pipeline may be richly rewarded for their investment in that project.<span style="mso-spacerun: yes">  </span>Look at it this way:<span style="mso-spacerun: yes">  </span>BP sold 0.875% of the CPC pipeline for $100 million.<span style="mso-spacerun: yes">   </span>This suggests that the CPC pipeline is worth $11.4 billion.<span style="mso-spacerun: yes">  </span>The pipeline was built between 1998 and 2001 for approximately $2.6.<span style="mso-spacerun: yes">  </span>Thus the sale price was more than four times the original investment.<span style="mso-spacerun: yes">  </span>If you could quadruple your original investment in four years, you d smile all the way to the bank.<a style='mso-footnote-id:ftn50' href="#_ftn50" name="_ftnref50" title=""><span class=MsoFootnoteReference><span style='mso-special-character: footnote'><![if !supportFootnotes]>[50]<![endif]></span></span></a><span style="mso-spacerun: yes">  </span>PetroKazhakstan must have thought it could realize significant savings on transportation charges by investing in CPC or it would not have been willing to invest $100 million in CPC. </p> <p class=MsoNormal style='text-indent:.5in;line-height:150%'><b><i><u><![if !supportEmptyParas]>&nbsp;<![endif]><o:p></o:p></u></i></b></p> <p class=MsoNormal style='text-indent:.5in;line-height:150%'><b><i><u>The Chicken-Egg Dilemma:<span style="mso-spacerun: yes">  </span>Part II.</u></i></b><span style="mso-spacerun: yes">   </span>The discovery of Kashagan in 2000 added a new dimension to the  chicken-egg dilemma.<span style="mso-spacerun: yes">  </span>A super-giant field probably larger than Tengiz, Kashagan is estimated to contain approximately 10 billion barrels of recoverable oil with first production anticipated by 2005.<a style='mso-footnote-id:ftn51' href="#_ftn51" name="_ftnref51" title=""><span class=MsoFootnoteReference><span style='mso-special-character:footnote'><![if !supportFootnotes]>[51]<![endif]></span></span></a><span style="mso-spacerun: yes">   </span>The ownership structure shown in Table 2 reflects the sale of a 14.29% share in Kashagan formerly held by BP and Statoil to the other members of the consortium.<a style='mso-footnote-id:ftn52' href="#_ftn52" name="_ftnref52" title=""><span class=MsoFootnoteReference><span style='mso-special-character:footnote'><![if !supportFootnotes]>[52]<![endif]></span></span></a> </p> <p class=MsoNormal style='text-indent:.5in;line-height:150%'><![if !supportEmptyParas]>&nbsp;<![endif]><o:p></o:p></p> <p class=MsoNormal style='text-indent:.5in;line-height:150%'><span style='font-size:4.0pt;mso-bidi-font-size:12.0pt'><![if !supportEmptyParas]>&nbsp;<![endif]><o:p></o:p></span></p> <p class=MsoNormal style='line-height:150%;tab-stops:3.0in'><b><u>Table 2.<span style="mso-spacerun: yes">  </span>Kashagan Project</u></b><span style='font-size:8.0pt;mso-bidi-font-size:12.0pt'><o:p></o:p></span></p> <p class=MsoBodyText3><span style='font-size:6.0pt;mso-bidi-font-size:12.0pt'><![if !supportEmptyParas]>&nbsp;<![endif]><o:p></o:p></span></p> <table border=1 cellspacing=0 cellpadding=0 style='border-collapse:collapse; border:none;mso-border-alt:solid windowtext .5pt;mso-padding-alt:0in 5.4pt 0in 5.4pt'> <tr> <td width=590 valign=top style='width:6.15in;border:solid windowtext .5pt; padding:0in 5.4pt 0in 5.4pt'> <p class=MsoNormal style='tab-stops:3.0in'><i><span style='font-size:11.0pt; mso-bidi-font-size:12.0pt'>Approximately 10 billion barrels; discovered in 2000; production anticipated to begin in 2005, peaking at approximately 1.2 million bpd around 2015.<o:p></o:p></span></i></p> <p class=MsoNormal style='tab-stops:3.0in'><span style="mso-spacerun: yes"> </span></p> </td> </tr> <tr> <td width=590 valign=top style='width:6.15in;border:solid windowtext .5pt; border-top:none;mso-border-top-alt:solid windowtext .5pt;padding:0in 5.4pt 0in 5.4pt'> <p class=MsoNormal style='tab-stops:3.0in'><u><span style='font-size:11.0pt; mso-bidi-font-size:12.0pt'>Owners:</span></u><span style='font-size:11.0pt; mso-bidi-font-size:12.0pt'><span style='mso-tab-count:1'>                                                            </span><u><o:p></o:p></u></span></p> <p class=MsoNormal style='tab-stops:3.0in'><u><span style='font-size:4.0pt; mso-bidi-font-size:12.0pt'><![if !supportEmptyParas]>&nbsp;<![endif]><o:p></o:p></span></u></p> <p class=MsoBodyText style='border:none;mso-padding-alt:0in 0in 0in 0in'><span style='font-style:normal'>Agip  ENI (16.67%), BG (16.67%), ConocoPhillips (8.33%), ExxonMobil (16.67%), Inpex (8.33%), Shell (16.67%), TotalElfFina (16.67%).<o:p></o:p></span></p> <p class=MsoNormal style='line-height:150%'><![if !supportEmptyParas]>&nbsp;<![endif]><o:p></o:p></p> </td> </tr> <tr> <td width=590 valign=top style='width:6.15in;border:solid windowtext .5pt; border-top:none;mso-border-top-alt:solid windowtext .5pt;padding:0in 5.4pt 0in 5.4pt'> <p class=MsoBodyText3><span style='font-size:8.0pt;mso-bidi-font-size:10.0pt'>From:<span style="mso-spacerun: yes">  </span>Phillips Petroleum Co.,  Kashagan Declared Commercial (press release), June 28, 2002.<o:p></o:p></span></p> <p class=MsoNormal style='tab-stops:3.0in'><![if !supportEmptyParas]>&nbsp;<![endif]><u><span style='font-size:11.0pt;mso-bidi-font-size:12.0pt'><o:p></o:p></span></u></p> </td> </tr> </table> <p class=MsoNormal style='text-indent:.5in;line-height:150%'><![if !supportEmptyParas]>&nbsp;<![endif]><o:p></o:p></p> <p class=MsoNormal style='text-indent:.5in;line-height:150%'>If production from both Tengiz and Kashagan increases during the coming decade as anticipated (see Tables 1 and 2), the CPC pipeline will not be able to transport all of Kazakhstan s new production to western markets.<span style="mso-spacerun: yes">  </span>One analyst estimates that by 2011 Kazakhstan will be producing 0.7 million bpd of oil in excess of export pipeline capacity by 2011.<span style="mso-spacerun: yes">  </span>The first candidate for transporting excess Kashagan production is the BTC pipeline, which is supposed to be ready to carry 1.0 million bpd by early 2005 and is contracted to carry the production from the third super-giant in the Caspian region, Azerbaijan s Azeri-Chirag-Gunashli complex (see Table 3).<a style='mso-footnote-id:ftn53' href="#_ftn53" name="_ftnref53" title=""><span class=MsoFootnoteReference><span style='mso-special-character:footnote'><![if !supportFootnotes]>[53]<![endif]></span></span></a></p> <p class=MsoNormal style='text-indent:.5in;line-height:150%'><![if !supportEmptyParas]>&nbsp;<![endif]><o:p></o:p></p> <p class=MsoNormal style='text-indent:.5in;line-height:150%'><span style='font-size:4.0pt;mso-bidi-font-size:12.0pt'><![if !supportEmptyParas]>&nbsp;<![endif]><o:p></o:p></span></p> <p class=MsoNormal style='text-indent:.5in;line-height:150%'><span style='font-size:4.0pt;mso-bidi-font-size:12.0pt'><![if !supportEmptyParas]>&nbsp;<![endif]><o:p></o:p></span></p> <h6 style='text-indent:0in;border:none;mso-padding-alt:0in 0in 0in 0in'>Table 3.<span style="mso-spacerun: yes">  </span>Azeri-Chirag-Gunashli (ACG) Field and BTC Pipeline Project<span style='font-size:4.0pt;mso-bidi-font-size:12.0pt'><o:p></o:p></span></h6> <table border=1 cellspacing=0 cellpadding=0 style='border-collapse:collapse; border:none;mso-border-alt:solid windowtext .5pt;mso-padding-alt:0in 5.4pt 0in 5.4pt'> <tr> <td width=295 valign=top style='width:221.4pt;border:solid windowtext .5pt; padding:0in 5.4pt 0in 5.4pt'> <h5 align=left style='text-align:left'><span style='font-weight:normal'>ACG Field</span></h5> </td> <td width=295 valign=top style='width:221.4pt;border:solid windowtext .5pt; border-left:none;mso-border-left-alt:solid windowtext .5pt;padding:0in 5.4pt 0in 5.4pt'> <p class=MsoNormal style='margin-left:1.0in;tab-stops:3.0in'><b><u><span style='font-size:11.0pt;mso-bidi-font-size:12.0pt'>BTC Pipeline<o:p></o:p></span></u></b></p> </td> </tr> <tr> <td width=295 valign=top style='width:221.4pt;border:solid windowtext .5pt; border-top:none;mso-border-top-alt:solid windowtext .5pt;padding:0in 5.4pt 0in 5.4pt'> <p class=MsoNormal style='tab-stops:3.0in'><i><span style='font-size:10.0pt; mso-bidi-font-size:12.0pt'>Estimated recoverable reserves of 5.4 billion barrels; production of 130,000 bpd in 2001 Anticipated to increase to 400,000 bpd by 2004, 800,000 bpd in 2007 and more than 1.0 million bpd in 2010</span></i><b><u><span style='font-size:11.0pt;mso-bidi-font-size:12.0pt'><o:p></o:p></span></u></b></p> </td> <td width=295 valign=top style='width:221.4pt;border-top:none;border-left: none;border-bottom:solid windowtext .5pt;border-right:solid windowtext .5pt; mso-border-top-alt:solid windowtext .5pt;mso-border-left-alt:solid windowtext .5pt; padding:0in 5.4pt 0in 5.4pt'> <p class=MsoNormal style='tab-stops:3.0in'><i><span style='font-size:10.0pt; mso-bidi-font-size:12.0pt'>From Baku (Azerbaijan oil to be exported in 2005; when completed, will) to Ceyhan (Turke)y; first carry 1.0 million bpd; total cost of $2.95 billion ($3.6 billion with financing).</span></i><b><u><span style='font-size:11.0pt;mso-bidi-font-size:12.0pt'><o:p></o:p></span></u></b></p> </td> </tr> <tr> <td width=295 valign=top style='width:221.4pt;border:solid windowtext .5pt; border-top:none;mso-border-top-alt:solid windowtext .5pt;padding:0in 5.4pt 0in 5.4pt'> <p class=MsoNormal style='tab-stops:3.0in'><i><u><span style='font-size:10.0pt; mso-bidi-font-size:12.0pt'>Owners:<o:p></o:p></span></u></i></p> </td> <td width=295 valign=top style='width:221.4pt;border-top:none;border-left: none;border-bottom:solid windowtext .5pt;border-right:solid windowtext .5pt; mso-border-top-alt:solid windowtext .5pt;mso-border-left-alt:solid windowtext .5pt; padding:0in 5.4pt 0in 5.4pt'> <p class=MsoNormal style='tab-stops:3.0in'><i><u><span style='font-size:10.0pt; mso-bidi-font-size:12.0pt'>Owners:<o:p></o:p></span></u></i></p> </td> </tr> <tr> <td width=295 valign=top style='width:221.4pt;border:solid windowtext .5pt; border-top:none;mso-border-top-alt:solid windowtext .5pt;padding:0in 5.4pt 0in 5.4pt'> <p class=MsoNormal style='tab-stops:3.0in'><span style='font-size:10.0pt; mso-bidi-font-size:12.0pt'>BP (34.14%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . <o:p></o:p></span></p> <p class=MsoBodyText3 style='tab-stops:3.0in'><span style='mso-bidi-font-size: 12.0pt'>Unocal (10.28%) </span>. . . . . . . . . . . . . . . . . . . . . . . . . . . . <span style='mso-bidi-font-size:12.0pt'><o:p></o:p></span></p> <p class=MsoNormal style='tab-stops:3.0in'><span style='font-size:10.0pt; mso-bidi-font-size:12.0pt'>State Oil Co. of Azaerbaijan (10.0%) . . . . . . . . . . . .<o:p></o:p></span></p> <p class=MsoNormal style='tab-stops:3.0in'><span style='font-size:10.0pt; mso-bidi-font-size:12.0pt'>LUKoil (10.0%)<o:p></o:p></span></p> <p class=MsoNormal style='tab-stops:3.0in'><span style='font-size:10.0pt; mso-bidi-font-size:12.0pt'>Statoil (8.56%)<span style="mso-spacerun: yes">  </span>. . . . . . . . . . . . . . . . . . . . . . . . . . . . . <o:p></o:p></span></p> <p class=MsoNormal style='tab-stops:3.0in'><span style='font-size:10.0pt; mso-bidi-font-size:12.0pt'>ExxonMobil (8.0%)<o:p></o:p></span></p> <p class=MsoNormal style='tab-stops:3.0in'><span style='font-size:10.0pt; mso-bidi-font-size:12.0pt'>TPAO (6.75%). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . <o:p></o:p></span></p> <p class=MsoBodyText3 style='tab-stops:3.0in'><span style='mso-bidi-font-size: 12.0pt'>Devon Energy (5.63%)<o:p></o:p></span></p> <p class=MsoNormal style='tab-stops:3.0in'><span style='font-size:10.0pt; mso-bidi-font-size:12.0pt'>Itochu (3.92%). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . <o:p></o:p></span></p> <p class=MsoNormal style='tab-stops:3.0in'><span style='font-size:10.0pt; mso-bidi-font-size:12.0pt'>Delta Hess (2.72%). . . . . . . . . . . . . . . . . . . . . . . . . . <i><u><o:p></o:p></u></i></span></p> </td> <td width=295 valign=top style='width:221.4pt;border-top:none;border-left: none;border-bottom:solid windowtext .5pt;border-right:solid windowtext .5pt; mso-border-top-alt:solid windowtext .5pt;mso-border-left-alt:solid windowtext .5pt; padding:0in 5.4pt 0in 5.4pt'> <p class=MsoNormal style='tab-stops:3.0in'><span style='font-size:10.0pt; mso-bidi-font-size:12.0pt'>BP (30.1%) <o:p></o:p></span></p> <p class=MsoNormal style='tab-stops:3.0in'><span style='font-size:10.0pt; mso-bidi-font-size:12.0pt'>Unocal (8.9%) <o:p></o:p></span></p> <p class=MsoNormal style='tab-stops:3.0in'><span style='font-size:10.0pt; mso-bidi-font-size:12.0pt'>State Oil Co. of Azerbaijan (25%)<o:p></o:p></span></p> <p class=MsoNormal style='tab-stops:3.0in'><span style='font-size:10.0pt; mso-bidi-font-size:12.0pt'><![if !supportEmptyParas]>&nbsp;<![endif]><o:p></o:p></span></p> <p class=MsoNormal style='tab-stops:3.0in'><span style='font-size:10.0pt; mso-bidi-font-size:12.0pt'>Statoil (8.71%)<o:p></o:p></span></p> <p class=MsoNormal style='tab-stops:3.0in'><span style='font-size:10.0pt; mso-bidi-font-size:12.0pt'><![if !supportEmptyParas]>&nbsp;<![endif]><o:p></o:p></span></p> <p class=MsoNormal style='tab-stops:3.0in'><span style='font-size:10.0pt; mso-bidi-font-size:12.0pt'>TPAO (6.53%)<o:p></o:p></span></p> <p class=MsoNormal style='tab-stops:3.0in'><span style='font-size:10.0pt; mso-bidi-font-size:12.0pt'><![if !supportEmptyParas]>&nbsp;<![endif]><o:p></o:p></span></p> <p class=MsoNormal style='tab-stops:3.0in'><span style='font-size:10.0pt; mso-bidi-font-size:12.0pt'>Itochu (3.4%)<o:p></o:p></span></p> <p class=MsoNormal style='tab-stops:3.0in'><span style='font-size:10.0pt; mso-bidi-font-size:12.0pt'>Delta Hess (2.36)<o:p></o:p></span></p> <p class=MsoNormal style='tab-stops:3.0in'><span style='font-size:10.0pt; mso-bidi-font-size:12.0pt'>Agip (2.5%)<o:p></o:p></span></p> <p class=MsoNormal style='tab-stops:3.0in'><span style='font-size:10.0pt; mso-bidi-font-size:12.0pt'>TotalElfFina (5%)<o:p></o:p></span></p> <p class=MsoNormal style='tab-stops:3.0in'><span style='font-size:10.0pt; mso-bidi-font-size:12.0pt'>ConocoPhillips (2.5%)<o:p></o:p></span></p> <p class=MsoNormal style='tab-stops:3.0in'><span style='font-size:10.0pt; mso-bidi-font-size:12.0pt'>INPEX (2.5%)<br style='mso-special-character:line-break'> <![if !supportLineBreakNewLine]><br style='mso-special-character:line-break'> <![endif]><i><u><o:p></o:p></u></i></span></p> </td> </tr> <tr> <td width=590 colspan=2 valign=top style='width:6.15in;border:solid windowtext .5pt; border-top:none;mso-border-top-alt:solid windowtext .5pt;padding:0in 5.4pt 0in 5.4pt'> <p class=MsoNormal style='tab-stops:3.0in'><span style='font-size:9.0pt; mso-bidi-font-size:12.0pt'>From:<span style="mso-spacerun: yes">  </span><a href="http://www.caspiandevelopmentandexport.com/">http://www.caspiandevelopmentandexport.com/</a> and  Building Tomorrow s Crisis? <o:p></o:p></span></p> </td> </tr> </table> <p class=MsoNormal style='text-indent:.5in;line-height:150%'><![if !supportEmptyParas]>&nbsp;<![endif]><o:p></o:p></p> <p class=MsoNormal style='text-indent:.5in;line-height:150%'>It is not clear whether the two major export routes to the west will be handle the production from the three super-giant fields and other production from the Caspian region.<span style="mso-spacerun: yes">  </span>Additionally, the schedules for expanding the capacity of two major pipelines may not match the increase in production from the three super-giant fields discussed above.<span style="mso-spacerun: yes">  </span>BTC needs oil in the first years of its life, but the Kazakhstan surplus may not materialize until several years later.<span style="mso-spacerun: yes">  </span>With a partially empty pipeline, BTC inves tors will face potentially serious problems recouping their investment in the early years.<span style="mso-spacerun: yes">  </span>Under these circumstances, BTC s projected rate of return  already below industry norms  could be seriously reduced.<a style='mso-footnote-id:ftn54' href="#_ftn54" name="_ftnref54" title=""><span class=MsoFootnoteReference><span style='mso-special-character:footnote'><![if !supportFootnotes]>[54]<![endif]></span></span></a><span style="mso-spacerun: yes">  </span>In recognition of these problems, the BTC Pipeline grants its owners the right to ship on the pipeline at reduced rates.<a style='mso-footnote-id:ftn55' href="#_ftn55" name="_ftnref55" title=""><span class=MsoFootnoteReference><span style='mso-special-character:footnote'><![if !supportFootnotes]>[55]<![endif]></span></span></a></p> <p class=MsoNormal style='text-indent:.5in;line-height:150%'>For oil produced in Kazakhstan, the BTC route poses another significant problem:<span style="mso-spacerun: yes">  </span>How to get that oil across the Caspian Sea to Baku?<span style="mso-spacerun: yes">  </span>The governments of Kazakhstan and Azerbaijan have a mutual interest in solving this problem  Kazakhstan wants to export oil and Azerbaijan wants to fill the BTC pipeline.<span style="mso-spacerun: yes">  </span>Possible solutions include surface transport by tanker and an undersea pipeline; both solutions add to the shipping costs, potentially reducing Kazakhstan s share of the petroleum revenue  take from its production.<a style='mso-footnote-id:ftn56' href="#_ftn56" name="_ftnref56" title=""><span class=MsoFootnoteReference><span style='mso-special-character: footnote'><![if !supportFootnotes]>[56]<![endif]></span></span></a> </p> <p class=MsoNormal style='text-indent:.5in;line-height:150%'>Another potential problem for BTC is that cost over-runs could increase per-barrel shipping costs, again depriving Kazakhstan of income.<span style="mso-spacerun: yes">  </span>With construction on the Georgia portion just beginning in 2003, a challenge by an environmental lawsuit there is accompanied by cost overruns and delays on the long portion through Turkey.<a style='mso-footnote-id:ftn57' href="#_ftn57" name="_ftnref57" title=""><span class=MsoFootnoteReference><span style='mso-special-character:footnote'><![if !supportFootnotes]>[57]<![endif]></span></span></a><span style="mso-spacerun: yes">  </span></p> <p class=MsoNormal style='line-height:150%'><![if !supportEmptyParas]>&nbsp;<![endif]><o:p></o:p></p> <p class=MsoNormal style='line-height:150%'><![if !supportEmptyParas]>&nbsp;<![endif]><o:p></o:p></p> <h4>Conclusion</h4> <p class=MsoBodyTextIndent>The major oil fields and the new pipeline routes out of the Caspian Basin face a wide range of technical, environmental, political and economic complications.<span style="mso-spacerun: yes">  </span>These problems might increase pipeline tariffs, decreasing government revenues and adversely affecting development.</p> <p class=MsoNormal style='text-indent:.5in;line-height:150%'>In the United States, pipeline tariffs are regulated to ensure all parties access to a pipeline on equal terms, and at rates that are just and reasonable.<span style="mso-spacerun: yes">  </span>Despite these safeguards, the RCA s November 2002 TAPS decision found that TAPS tariffs have been inflated, with two major consequences: reduced host government revenue and a decrease in the robust competition among potential producers that many observers believe is vital to development.<span style="mso-spacerun: yes">  </span>It has yet to be determined whether the state of Alaska intends address the arguments set out in the RCA s TAPS decision in a meaningful manner.<span style="mso-spacerun: yes">  </span><span style="mso-spacerun: yes">  </span></p> <p class=MsoNormal style='text-indent:.5in;line-height:150%'>The legal framework for pipeline regulation emerging in the Caspian Basin appears to be quite different from that of the United States.<span style="mso-spacerun: yes">   </span>As PetroKazakhstan s attempt to buy into the CPC pipeline and the differential rates on the BTC pipeline make clear, pipeline owners are allowed to derive significant differential benefits from their ownership.<span style="mso-spacerun: yes">   </span></p> <p class=MsoBodyTextIndent>In light of Alaska s experience and the contrast between the regulatory approach to pipeline economics, the people of the Caspian Basin should insist on vigilance and attention to detail in analyzing pipeline tariff policy and execution.</p> <p class=MsoBodyTextIndent>________</p> </div> <div style='mso-element:footnote-list'><![if !supportFootnotes]><br clear=all> <hr align=left size=1 width="33%"> <![endif]> <div style='mso-element:footnote' id=ftn1> <p class=MsoFootnoteText><a style='mso-footnote-id:ftn1' href="#_ftnref1" name="_ftn1" title=""><span class=MsoFootnoteReference><span style='mso-special-character: footnote'><![if !supportFootnotes]>[1]<![endif]></span></span></a> This article rests on the premise that revenues from resource extraction should enrich the lives of the people of the territory from which those resources are taken from the earth.<span style="mso-spacerun: yes">  </span>Achievement of this fundamental human right depends on the degree to which the financial mechanisms by which oil is transformed into wealth are implemented in a just and meaningful manner.<span style="mso-spacerun: yes">  </span>Therefore, this article is focused on the revenue stream produced by petroleum development, rather than the ecological effects of pipeline construction and operations on land, air and water.</p> <p class=MsoFootnoteText><![if !supportEmptyParas]>&nbsp;<![endif]><o:p></o:p></p> </div> <div style='mso-element:footnote' id=ftn2> <p class=MsoFootnoteText><a style='mso-footnote-id:ftn2' href="#_ftnref2" name="_ftn2" title=""><span class=MsoFootnoteReference><span style='mso-special-character: footnote'><![if !supportFootnotes]>[2]<![endif]></span></span></a> The term  super-giant is usually reserved for oil fields estimated to contain at least 5.0 billion barrels of recoverable oil.<span style="mso-spacerun: yes">  </span>In 1993 there were only 42 such fields in the world (L.F. Ivanhoe and G.G. Leckie,  Global Oil, Gas Fields, Sizes, Tallied, Analyzed, <i style='mso-bidi-font-style:normal'>Oil &amp; Gas Journal</i>, Feb. 15, 1993, pp. 87-91).<span style="mso-spacerun: yes">  </span>Alaska and the Caspian Basin are among the relatively few regions outside the Persian Gulf that possess super-giant oil reservoirs. </p> <p class=MsoFootnoteText><![if !supportEmptyParas]>&nbsp;<![endif]><o:p></o:p></p> </div> <div style='mso-element:footnote' id=ftn3> <p class=MsoFootnoteText><a style='mso-footnote-id:ftn3' href="#_ftnref3" name="_ftn3" title=""><span class=MsoFootnoteReference><span style='mso-special-character: footnote'><![if !supportFootnotes]>[3]<![endif]></span></span></a><span style="mso-spacerun: yes">  </span>See:<span style="mso-spacerun: yes">  </span>Alaska Department of Revenue, <i>Revenue Sources Book:<span style="mso-spacerun: yes">  </span>Forecast and Historical Data, </i>Spring 2003, Appendix D.<span style="mso-spacerun: yes">  </span>(on-line at<i> www.revenue.state.ak.us</i>).</p> <p class=MsoFootnoteText><![if !supportEmptyParas]>&nbsp;<![endif]><o:p></o:p></p> </div> <div style='mso-element:footnote' id=ftn4> <p class=MsoEndnoteText><a style='mso-footnote-id:ftn4' href="#_ftnref4" name="_ftn4" title=""><span class=MsoFootnoteReference><span style='mso-special-character: footnote'><![if !supportFootnotes]>[4]<![endif]></span></span></a> Mergers and acquisitions have changed the corporate names of the three dominant companies on Alaska s North Slope.<i style='mso-bidi-font-style:normal'><span style="mso-spacerun: yes">  </span></i>BP s U.S. subsidiary merged with the Standard Oil Company of Ohio (Sohio) in 1970 and formally took over management of its Alaska partner in 1987; ExxonMobil represents the combined interests of the former Exxon and Mobil Corporations; Phillips Petroleum became the third major North Slope player by virtue of Phillips Petroleum s<span style="mso-spacerun: yes">  </span>acquisition of ARCO s Alaska properties in 2000.<span style="mso-spacerun: yes">  </span>United States antitrust regulators required BP to divest ARCO s Alaska holdings as a condition of its global merger with ARCO; the enlarged Phillips subsequently merged with Conoco, which held smaller interests on the North Slope before trading them to BP and leaving Alaska in 1993.)</p> <p class=MsoFootnoteText><![if !supportEmptyParas]>&nbsp;<![endif]><o:p></o:p></p> </div> <div style='mso-element:footnote' id=ftn5> <p class=MsoFootnoteText><a style='mso-footnote-id:ftn5' href="#_ftnref5" name="_ftn5" title=""><span class=MsoFootnoteReference><span style='mso-special-character: footnote'><![if !supportFootnotes]>[5]<![endif]></span></span></a> <span style="mso-spacerun: yes"> </span>Data for 1977-87 from: Edward B. Deakin, <i>Oil Industry Profitability in Alaska, 1969 through 1987 </i>[Alaska Dept. of Revenue, 1989], Appendix E; data for 1988-1998 from:<span style="mso-spacerun: yes">  </span>Alaska Department of Revenue,  State of Alaska s Oil Revenue Pie (Production and Value Added by TAPS), <span style="mso-spacerun: yes">  </span>March 22, 2000 (in letter from Dan E. Dickinson, Director, Tax Division, to Representative Jim Whitaker, Chair, Special Committee on Oil and Gas, Alaska State House of Representatives).<span style="mso-spacerun: yes">  </span>Adjusted to 2003 dollars using Consumer Price Index (CPI-U), industry North Slope production and pipeline profits totaled approximately $118.0 billion).</p> <p class=MsoFootnoteText><![if !supportEmptyParas]>&nbsp;<![endif]><o:p></o:p></p> </div> <div style='mso-element:footnote' id=ftn6> <p class=MsoFootnoteText><a style='mso-footnote-id:ftn6' href="#_ftnref6" name="_ftn6" title=""><span class=MsoFootnoteReference><span style='mso-special-character: footnote'><![if !supportFootnotes]>[6]<![endif]></span></span></a><span style="mso-spacerun: yes">  </span>Estimated from Deakin and  State of Alaska s Oil Revenue Pie (Production and Value Added by TAPS). <span style="mso-spacerun: yes">  </span></p> <p class=MsoFootnoteText><![if !supportEmptyParas]>&nbsp;<![endif]><o:p></o:p></p> </div> <div style='mso-element:footnote' id=ftn7> <p class=MsoFootnoteText><a style='mso-footnote-id:ftn7' href="#_ftnref7" name="_ftn7" title=""><span class=MsoFootnoteReference><span style='mso-special-character: footnote'><![if !supportFootnotes]>[7]<![endif]></span></span></a><span style="mso-spacerun: yes">  </span>TAPS profit data from Richard A. Fineberg, <i>How Much Is Enough?<span style="mso-spacerun: yes">  </span>Estimated Industry Profits From Alaska North Slope Production and Associated Pipeline Operations, 1993-1998</i> (Oilwatch Alaska, 1998), Table 4.1.<span style="mso-spacerun: yes">  </span></p> <p class=MsoFootnoteText><![if !supportEmptyParas]>&nbsp;<![endif]><o:p></o:p></p> </div> <div style='mso-element:footnote' id=ftn8> <p class=MsoFootnoteText><a style='mso-footnote-id:ftn8' href="#_ftnref8" name="_ftn8" title=""><span class=MsoFootnoteReference><span style='mso-special-character: footnote'><![if !supportFootnotes]>[8]<![endif]></span></span></a><span style="mso-spacerun: yes">  </span>Approximately eight percent of the oil shipped through TAPS goes to in-state refineries.<span style="mso-spacerun: yes">  </span>But the state commission s 165-page decision calls into question the shipping rates for the remaining 92 percent of TAPS oil because that oil is shipped under a similar formula arrangement approved by the Federal Energy Regulatory Commission (FERC).</p> <p class=MsoFootnoteText><span style="mso-spacerun: yes"> </span></p> </div> <div style='mso-element:footnote' id=ftn9> <p class=MsoFootnoteText><a style='mso-footnote-id:ftn9' href="#_ftnref9" name="_ftn9" title=""><span class=MsoFootnoteReference><span style='mso-special-character: footnote'><![if !supportFootnotes]>[9]<![endif]></span></span></a><span style="mso-spacerun: yes">  </span>Regulatory Commission of Alaska, <i>Order Rejecting 1997, 1998, 1999 and 2000 Filed TAPS Rates; Setting Just and Reasonable Rates; Requiring Refunds and Filings; and Outlining Phase II Issues,</i> Docket P-97-4, Order #151 Nov. 27, 2002 (on-line at <i>www.state.ak.us/rca</i>).<span style="mso-spacerun: yes">     </span></p> <p class=MsoFootnoteText><![if !supportEmptyParas]>&nbsp;<![endif]><o:p></o:p></p> </div> <div style='mso-element:footnote' id=ftn10> <p class=MsoFootnoteText><a style='mso-footnote-id:ftn10' href="#_ftnref10" name="_ftn10" title=""><span class=MsoFootnoteReference><span style='mso-special-character: footnote'><![if !supportFootnotes]>[10]<![endif]></span></span></a> Although the RCA has jurisdiction only over the shipping charges for approximately eight percent of the oil shipped through TAPS, the state commission s decision calls into question the shipping rates for the remaining 92 percent of TAPS oil shipped under a similar formula arrangement approved by the Federal Energy Regulatory Commission (FERC).</p> <p class=MsoFootnoteText><span style="mso-spacerun: yes"> </span></p> </div> <div style='mso-element:footnote' id=ftn11> <p class=MsoFootnoteText><a style='mso-footnote-id:ftn11' href="#_ftnref11" name="_ftn11" title=""><span class=MsoFootnoteReference><span style='mso-special-character: footnote'><![if !supportFootnotes]>[11]<![endif]></span></span></a><span style="mso-spacerun: yes">  </span>Allen Baker,  State weighs pipeline fees -- $110 Million:<span style="mso-spacerun: yes">  </span>If rates are cut, Alaskans, small producers benefit, <i>Anchorage Daily News,</i> Dec. 31, 2002, p. A-1.</p> <p class=MsoFootnoteText><span style='font-size:6.0pt;mso-bidi-font-size:10.0pt'><![if !supportEmptyParas]>&nbsp;<![endif]><o:p></o:p></span></p> </div> <div style='mso-element:footnote' id=ftn12> <p class=MsoFootnoteText><a style='mso-footnote-id:ftn12' href="#_ftnref12" name="_ftn12" title=""><span class=MsoFootnoteReference><span style='mso-special-character: footnote'><![if !supportFootnotes]>[12]<![endif]></span></span></a><span style="mso-spacerun: yes">  </span> <span style='font-size:2.0pt;mso-bidi-font-size: 10.0pt'> </span> Good news wanted in 2003, <i>Petroleum News Alaska,</i> Jan. 19, 2003, p. 1.</p> <p class=MsoFootnoteText><span style='font-size:6.0pt;mso-bidi-font-size:10.0pt'><![if !supportEmptyParas]>&nbsp;<![endif]><o:p></o:p></span></p> </div> <div style='mso-element:footnote' id=ftn13> <p class=MsoFootnoteText><a style='mso-footnote-id:ftn13' href="#_ftnref13" name="_ftn13" title=""><span class=MsoFootnoteReference><span style='mso-special-character: footnote'><![if !supportFootnotes]>[13]<![endif]></span></span></a><span style="mso-spacerun: yes">  </span>Sean Cockerham,  Oil lease probe sought  Permanent Fund:<span style="mso-spacerun: yes">  </span>Corporation worries smaller companies are shut out, state is being shortchanged<i>, Anchorage Daily News,</i> Feb. 20, 2003<span style="mso-spacerun: yes">  </span>(on-line).</p> <p class=MsoFootnoteText><span style='font-size:6.0pt;mso-bidi-font-size:10.0pt'><![if !supportEmptyParas]>&nbsp;<![endif]><o:p></o:p></span></p> </div> <div style='mso-element:footnote' id=ftn14> <p class=MsoFootnoteText><a style='mso-footnote-id:ftn14' href="#_ftnref14" name="_ftn14" title=""><span class=MsoFootnoteReference><span style='mso-special-character: footnote'><![if !supportFootnotes]>[14]<![endif]></span></span></a><span style="mso-spacerun: yes">  </span>See: <i>Indicated TAPS Cariers Statement of Points on Appeal, </i>Amerada Hess Pipeline Corporation, BP Pipelines (Alaska) Inc., ExxonMobil Pipeline Company, Mobil Alaska Pipeline Company, Phillips Transportation Alaska, Inc. and Unocal Pipeline Co. v. Regulatory Commission of Alaska, Dec. 6, 2002 (Superior Court for the State of Alaska, Third Judicial District, Case No. 3AN-02-___ CIV); and Wesley Loy,  Oil bill would  decapitate regulators, critics say, <i>Anchorage Daily News</i>, April 26, 2003 (on-line).</p> <p class=MsoFootnoteText><![if !supportEmptyParas]>&nbsp;<![endif]><o:p></o:p></p> </div> <div style='mso-element:footnote' id=ftn15> <p class=MsoFootnoteText><a style='mso-footnote-id:ftn15' href="#_ftnref15" name="_ftn15" title=""><span class=MsoFootnoteReference><span style='mso-special-character: footnote'><![if !supportFootnotes]>[15]<![endif]></span></span></a><span style="mso-spacerun: yes">  </span>Conoco was an independent oil company until 2001, when it merged with the Phillips Petroleum Co. to become part of ConocoPhillips (see footnote 3, above).<span style="mso-spacerun: yes">  </span></p> <p class=MsoFootnoteText><![if !supportEmptyParas]>&nbsp;<![endif]><o:p></o:p></p> </div> <div style='mso-element:footnote' id=ftn16> <p class=MsoFootnoteText><a style='mso-footnote-id:ftn16' href="#_ftnref16" name="_ftn16" title=""><span class=MsoFootnoteReference><span style='mso-special-character: footnote'><![if !supportFootnotes]>[16]<![endif]></span></span></a> For the effect of pipeline costs on Conoco s profitability during its final year of operation in Alaska, see <i style='mso-bidi-font-style:normal'>How Much Is Enough?,</i> op. cit.,<i style='mso-bidi-font-style:normal'> </i>pp. 27-35.</p> <p class=MsoFootnoteText><![if !supportEmptyParas]>&nbsp;<![endif]><o:p></o:p></p> </div> <div style='mso-element:footnote' id=ftn17> <p class=MsoEndnoteText><a style='mso-footnote-id:ftn17' href="#_ftnref17" name="_ftn17" title=""><span class=MsoFootnoteReference><span style='mso-special-character: footnote'><![if !supportFootnotes]>[17]<![endif]></span></span></a> For Dunham s statements see  Getting to the Future First, <i style='mso-bidi-font-style: normal'> Hart s Oil and Gas Investor,</i> August 1996, p. 41. </p> <p class=MsoFootnoteText><span style='font-size:6.0pt;mso-bidi-font-size:10.0pt'><![if !supportEmptyParas]>&nbsp;<![endif]><o:p></o:p></span></p> </div> <div style='mso-element:footnote' id=ftn18> <p class=MsoEndnoteText><a style='mso-footnote-id:ftn18' href="#_ftnref18" name="_ftn18" title=""><span class=MsoFootnoteReference><span style='mso-special-character: footnote'><![if !supportFootnotes]>[18]<![endif]></span></span></a><span style="mso-spacerun: yes">  </span><i>Indicated TAPS Cariers Statement of Points on Appeal.</i></p> <p class=MsoFootnoteText><![if !supportEmptyParas]>&nbsp;<![endif]><o:p></o:p></p> </div> <div style='mso-element:footnote' id=ftn19> <p class=MsoFootnoteText><a style='mso-footnote-id:ftn19' href="#_ftnref19" name="_ftn19" title=""><span class=MsoFootnoteReference><span style='mso-special-character: footnote'><![if !supportFootnotes]>[19]<![endif]></span></span></a><span style="mso-spacerun: yes">  </span> Oil bill would  decapitate regulators, critics say. </p> <p class=MsoFootnoteText><span style='font-size:6.0pt;mso-bidi-font-size:10.0pt'><![if !supportEmptyParas]>&nbsp;<![endif]><o:p></o:p></span></p> </div> <div style='mso-element:footnote' id=ftn20> <p class=MsoFootnoteText><a style='mso-footnote-id:ftn20' href="#_ftnref20" name="_ftn20" title=""><span class=MsoFootnoteReference><span style='mso-special-character: footnote'><![if !supportFootnotes]>[20]<![endif]></span></span></a><span style="mso-spacerun: yes">  </span>This discussion of the treatment of DR&amp;R on TAPS<span style="mso-spacerun: yes">  </span>is presented as an example of the way in which complex formula can be used to generate profits.<span style="mso-spacerun: yes">  </span>Provisions for dealing with dismantling issues in the Caspian Basin differ significantly from those governing TAPS.<span style="mso-spacerun: yes">  </span></p> <p class=MsoFootnoteText><![if !supportEmptyParas]>&nbsp;<![endif]><o:p></o:p></p> </div> <div style='mso-element:footnote' id=ftn21> <p class=MsoFootnoteText><a style='mso-footnote-id:ftn21' href="#_ftnref21" name="_ftn21" title=""><span class=MsoFootnoteReference><span style='mso-special-character: footnote'><![if !supportFootnotes]>[21]<![endif]></span></span></a> Regulatory Commission of Alaska, <i>Order Denying Indicated TAPS Carriers Motion to Cancel Prehearing Conference and Ruling on DR&amp;R Question,</i> Docket P-97-4, Order #157, March 6, 2003 (on-line at <i>www.state.ak.us/rca</i>).</p> <p class=MsoFootnoteText><span style='font-size:6.0pt;mso-bidi-font-size:10.0pt'><![if !supportEmptyParas]>&nbsp;<![endif]><o:p></o:p></span></p> </div> <div style='mso-element:footnote' id=ftn22> <p class=MsoFootnoteText><a style='mso-footnote-id:ftn22' href="#_ftnref22" name="_ftn22" title=""><span class=MsoFootnoteReference><span style='mso-special-character: footnote'><![if !supportFootnotes]>[22]<![endif]></span></span></a><span style="mso-spacerun: yes">  </span><i style='mso-bidi-font-style:normal'>Prefiled Testimony of Rudolph L. Bertschi </i><span style="mso-spacerun: yes">  </span>(Alaska Public Utilities Commission Docket No. P-86-2), December 17, 1986, pp. 63-70.<span style="mso-spacerun: yes">  </span></p> <p class=MsoFootnoteText><span style='font-size:6.0pt;mso-bidi-font-size:10.0pt'><span style="mso-spacerun: yes"> </span><o:p></o:p></span></p> </div> <div style='mso-element:footnote' id=ftn23> <p class=MsoFootnoteText><a style='mso-footnote-id:ftn23' href="#_ftnref23" name="_ftn23" title=""><span class=MsoFootnoteReference><span style='mso-special-character: footnote'><![if !supportFootnotes]>[23]<![endif]></span></span></a><span style="mso-spacerun: yes">  </span>For a summary and economic analysis of DR&amp;R issues in the context of the TAPS tariffs, see Richard A. Fineberg, <i>The Emperor s New Hose:<span style="mso-spacerun: yes">  </span>How Big Oil Gets Rich Gambling with Alaska s Environment</i> (Alaska Forum for Environmental Responsibility, June 2002), Chapter 5 (on-line at <i>www.alaskaforum.org</i>).</p> <p class=MsoFootnoteText><![if !supportEmptyParas]>&nbsp;<![endif]><o:p></o:p></p> </div> <div style='mso-element:footnote' id=ftn24> <p class=MsoFootnoteText><a style='mso-footnote-id:ftn24' href="#_ftnref24" name="_ftn24" title=""><span class=MsoFootnoteReference><span style='mso-special-character: footnote'><![if !supportFootnotes]>[24]<![endif]></span></span></a><span style="mso-spacerun: yes">  </span>This issue is briefly summarized in Richard A. Fineberg,  New filings reveal oil pipeline owners tax scam, <i>Anchorage Daily News</i>, Feb. 8, 2000, p. B-8. </p> <p class=MsoFootnoteText><span style='font-size:6.0pt;mso-bidi-font-size:10.0pt'><![if !supportEmptyParas]>&nbsp;<![endif]><o:p></o:p></span></p> </div> <div style='mso-element:footnote' id=ftn25> <p class=MsoFootnoteText><a style='mso-footnote-id:ftn25' href="#_ftnref25" name="_ftn25" title=""><span class=MsoFootnoteReference><span style='mso-special-character: footnote'><![if !supportFootnotes]>[25]<![endif]></span></span></a><span style="mso-spacerun: yes">  </span>Alaska State House House Oil and Gas Committee hearing, April 13, 2000 and follow-up letter from Michael A. Barnhill, Assistant Attorney General, to Rep. Jim Whitaker, May 23, 2000.<span style="mso-spacerun: yes">  </span></p> <p class=MsoFootnoteText><span style='font-size:6.0pt;mso-bidi-font-size:10.0pt'><![if !supportEmptyParas]>&nbsp;<![endif]><o:p></o:p></span></p> </div> <div style='mso-element:footnote' id=ftn26> <p class=MsoFootnoteText><a style='mso-footnote-id:ftn26' href="#_ftnref26" name="_ftn26" title=""><span class=MsoFootnoteReference><span style='mso-special-character: footnote'><![if !supportFootnotes]>[26]<![endif]></span></span></a><span style="mso-spacerun: yes">  </span>This account is taken primarily from the following court documents:<span style="mso-spacerun: yes">  </span> Complaint, <i>Maritime Endeavor Associates, L.P. v. Alyeska Pipeline Service Company,</i><span style="mso-spacerun: yes">  </span>Alaska Superior Court Case No. 1JU-95-1141 Civil, May 31, 1995;  Complaint, <span style="mso-spacerun: yes">  </span><i>Maritime Endeavor Associates, L.P. v. Alyeska Pipeline Service Company, Inc., BP America, Inc., BP Oil Company, BP Oil Supply Co., BP Exploration &amp; Oil Inc., BP Oil Shipping Co. USA, BP Pipelines (Alaska) Inc., Amerada Hess Pipeline Corp., ARCO Transportation Alaska Inc., Exxon Pipeline Co., Mobil Alaska Pipeline Co., Phillips Petroleum Co. and Unocal Pipeline Co</i>., United States District Court (Juneau) Case No. J97-010 CV (HRH), May 27, 1997;  Memorandum of Decision and Order, Case No. 1JU-95-1141 CI, Sept. 30, 1998; and  Stipulation and Order for:<span style="mso-spacerun: yes">  </span>Vacation of September 30, 1998 Memorandum of Decision and Order and Dismissal of Action with Prejudice, Case No. 1JU-95-1141 CI, Feb. 17, 1999.</p> <p class=MsoFootnoteText><span style='font-size:6.0pt;mso-bidi-font-size:10.0pt'><span style="mso-spacerun: yes"> </span><o:p></o:p></span></p> </div> <div style='mso-element:footnote' id=ftn27> <p class=MsoFootnoteText><a style='mso-footnote-id:ftn27' href="#_ftnref27" name="_ftn27" title=""><span class=MsoFootnoteReference><span style='mso-special-character: footnote'><![if !supportFootnotes]>[27]<![endif]></span></span></a><span style="mso-spacerun: yes">  </span>Author s interview with attorneys representing U.S. Oil s successors (Maritime Endeavor Associates, L.P.).</p> <p class=MsoFootnoteText><span style='font-size:6.0pt;mso-bidi-font-size:10.0pt'><![if !supportEmptyParas]>&nbsp;<![endif]><o:p></o:p></span></p> </div> <div style='mso-element:footnote' id=ftn28> <p class=MsoFootnoteText><a style='mso-footnote-id:ftn28' href="#_ftnref28" name="_ftn28" title=""><span class=MsoFootnoteReference><span style='mso-special-character: footnote'><![if !supportFootnotes]>[28]<![endif]></span></span></a><span style="mso-spacerun: yes">  </span>Letter from Alaska Attorney General Bruce Botelho to Jim Sykes, Executive Director, Oilwatch Alaska, Nov. 28, 2997 (see also:<span style="mso-spacerun: yes">  </span>Brian O Donoghue,  Suits allege antitrust violations by Alyeska, <i>Fairbanks Daily News-Miner,</i> November 30, 1997, p. A-1).</p> <p class=MsoFootnoteText><span style='font-size:6.0pt;mso-bidi-font-size:10.0pt'><span style="mso-spacerun: yes"> </span><o:p></o:p></span></p> </div> <div style='mso-element:footnote' id=ftn29> <p class=MsoFootnoteText><a style='mso-footnote-id:ftn29' href="#_ftnref29" name="_ftn29" title=""><span class=MsoFootnoteReference><span style='mso-special-character: footnote'><![if !supportFootnotes]>[29]<![endif]></span></span></a> <i style='mso-bidi-font-style:normal'>Settlement Agreement between The State of Alaska and ARCO Pipe Line Co., BP Pipelines Inc., Exxon Pipeline Co., Mobil Alaska Pipeline Co., Union Alaska Pipeline Co. with Respect to the Trans Alaska Pipeline System, </i>June 28, 1985 (Federal Energy Regulatory Commission<span style="mso-spacerun: yes">  </span>Docket OR 78-1), p. 1.</p> <p class=MsoFootnoteText><span style='font-size:6.0pt;mso-bidi-font-size:10.0pt'><![if !supportEmptyParas]>&nbsp;<![endif]><o:p></o:p></span></p> </div> <div style='mso-element:footnote' id=ftn30> <p class=MsoFootnoteText><a style='mso-footnote-id:ftn30' href="#_ftnref30" name="_ftn30" title=""><span class=MsoFootnoteReference><span style='mso-special-character: footnote'><![if !supportFootnotes]>[30]<![endif]></span></span></a><span style="mso-spacerun: yes">  </span>In the RCA tariff proceedings, the State of Alaska, represented by the Department of Law, supported the 1985 settlement in opposition to the shippers who sought lower tariffs.</p> <p class=MsoFootnoteText><![if !supportEmptyParas]>&nbsp;<![endif]><o:p></o:p></p> </div> <div style='mso-element:footnote' id=ftn31> <p class=MsoFootnoteText><a style='mso-footnote-id:ftn31' href="#_ftnref31" name="_ftn31" title=""><span class=MsoFootnoteReference><span style='mso-special-character: footnote'><![if !supportFootnotes]>[31]<![endif]></span></span></a><span style="mso-spacerun: yes">  </span><i>Settlement,</i> Section<span style="mso-spacerun: yes">  </span>I-3.</p> <p class=MsoFootnoteText><span style='font-size:6.0pt;mso-bidi-font-size:10.0pt'><![if !supportEmptyParas]>&nbsp;<![endif]><o:p></o:p></span></p> </div> <div style='mso-element:footnote' id=ftn32> <p class=MsoFootnoteText><a style='mso-footnote-id:ftn32' href="#_ftnref32" name="_ftn32" title=""><span class=MsoFootnoteReference><span style='mso-special-character: footnote'><![if !supportFootnotes]>[32]<![endif]></span></span></a><span style="mso-spacerun: yes">  </span> Oil and Gas Settlements, attachment to letter from Bruce M. Botelho (Alaska Attorney General) to Representative Eric Croft (Alaska State House of Representatives), Feb. 7, 2001. <span style="mso-spacerun: yes"> </span></p> </div> <div style='mso-element:footnote' id=ftn33> <p class=MsoFootnoteText><a style='mso-footnote-id:ftn33' href="#_ftnref33" name="_ftn33" title=""><span class=MsoFootnoteReference><span style='mso-special-character: footnote'><![if !supportFootnotes]>[33]<![endif]></span></span></a> For a summary of Caspian Sea region reserves, production and pipeline routes, see:<span style="mso-spacerun: yes">  </span>U.S. Energy Information Agency,  Kazakhstan (country briefing report), January 2002 and<span style="mso-spacerun: yes">  </span> Caspian Sea Region:<span style="mso-spacerun: yes">  </span>Reserves and Pipeline Tables, July 2002, Tables 1, 2 and 4 (on-line at <i>http://www.eia.doe.gov</i>).</p> <p class=MsoFootnoteText><![if !supportEmptyParas]>&nbsp;<![endif]><o:p></o:p></p> </div> <div style='mso-element:footnote' id=ftn34> <p class=MsoFootnoteText><a style='mso-footnote-id:ftn34' href="#_ftnref34" name="_ftn34" title=""><span class=MsoFootnoteReference><span style='mso-special-character: footnote'><![if !supportFootnotes]>[34]<![endif]></span></span></a> Mark Mansley,  Building Tomorrow s Crisis? The Baku-Tbilisi-Ceyhan Pipeline and BP:<span style="mso-spacerun: yes">  </span>A Financial Analysis, Claros Consulting, May 2003 (on-line at <i>http://www.bankwatch.org</i>), p. 9.<span style="mso-spacerun: yes">  </span></p> <p class=MsoFootnoteText><![if !supportEmptyParas]>&nbsp;<![endif]><o:p></o:p></p> </div> <div style='mso-element:footnote' id=ftn35> <p class=MsoFootnoteText><a style='mso-footnote-id:ftn35' href="#_ftnref35" name="_ftn35" title=""><span class=MsoFootnoteReference><span style='mso-special-character: footnote'><![if !supportFootnotes]>[35]<![endif]></span></span></a> Robert M. Cutler,  The Caspian Pipeline Consortium Beats the Skeptics, <i>The Analyst</i>, Sept. 12, 2001 (on-line); and  Caspian Sea Region:<span style="mso-spacerun: yes">  </span>Reserves and Pipeline Tables, July 2002.</p> </div> <div style='mso-element:footnote' id=ftn36> <p class=MsoFootnoteText><a style='mso-footnote-id:ftn36' href="#_ftnref36" name="_ftn36" title=""><span class=MsoFootnoteReference><span style='mso-special-character: footnote'><![if !supportFootnotes]>[36]<![endif]></span></span></a> See:<span style="mso-spacerun: yes">  </span>Lukoil,  International exploration and production, undated (circa 2002;<span style="mso-spacerun: yes">  </span>on-line<span style="mso-spacerun: yes">  </span>at <i><span style='mso-bidi-font-size:9.0pt'>http://www.lukoil.com/razvedka_dobycha/inter.htm</span></i><span style='mso-bidi-font-size:9.0pt'>).<o:p></o:p></span></p> <p class=MsoFootnoteText><![if !supportEmptyParas]>&nbsp;<![endif]><o:p></o:p></p> </div> <div style='mso-element:footnote' id=ftn37> <p class=MsoFootnoteText><a style='mso-footnote-id:ftn37' href="#_ftnref37" name="_ftn37" title=""><span class=MsoFootnoteReference><span style='mso-special-character: footnote'><![if !supportFootnotes]>[37]<![endif]></span></span></a> See for example:<span style="mso-spacerun: yes">  </span>Charles Coe,  Questions concerning Kazakhstan s future go beyond oil, <span style="mso-spacerun: yes">  </span>Alexander s Gas &amp; Oil Connections, July 31, 2002 (on-line at <i>http://www.gasandoil.com/goc/news/ntc23492.htm</i>); and Pravda On-line,  Hurricane Abandons $100 Million Pipeline Deal, June 17, 2002 (on-line at <i><span style='mso-bidi-font-size:9.0pt'>http://english.pravda.ru/comp/2002/06/17/30498.html</span></i><span style='mso-bidi-font-size:9.0pt'>; originally published by Reuters, June 14, 2002).</span></p> <p class=MsoFootnoteText><![if !supportEmptyParas]>&nbsp;<![endif]><o:p></o:p></p> </div> <div style='mso-element:footnote' id=ftn38> <p class=MsoFootnoteText><a style='mso-footnote-id:ftn38' href="#_ftnref38" name="_ftn38" title=""><span class=MsoFootnoteReference><span style='mso-special-character: footnote'><![if !supportFootnotes]>[38]<![endif]></span></span></a><span style="mso-spacerun: yes">  </span>Caspian Pipeline Consortium,  Caspian Pipeline Consortium Shareholders Approve Budget for the Year 2001  CPC General Director Viktor Fedotov to be succeeded by Sergei Gnatchenko, Dec. 1, 2000 (press release; on-line at <i>http://www.cpc-ltd.com/</i>).</p> <p class=MsoFootnoteText><![if !supportEmptyParas]>&nbsp;<![endif]><o:p></o:p></p> </div> <div style='mso-element:footnote' id=ftn39> <p class=MsoFootnoteText><a style='mso-footnote-id:ftn39' href="#_ftnref39" name="_ftn39" title=""><span class=MsoFootnoteReference><span style='mso-special-character: footnote'><![if !supportFootnotes]>[39]<![endif]></span></span></a>  The Caspian Pipeline Consortium Beats the Skeptics. </p> <p class=MsoFootnoteText><![if !supportEmptyParas]>&nbsp;<![endif]><o:p></o:p></p> </div> <div style='mso-element:footnote' id=ftn40> <p class=MsoFootnoteText><a style='mso-footnote-id:ftn40' href="#_ftnref40" name="_ftn40" title=""><span class=MsoFootnoteReference><span style='mso-special-character: footnote'><![if !supportFootnotes]>[40]<![endif]></span></span></a><span style="mso-spacerun: yes">  </span>Michael Lelyveld,  Kazakhstan: Foreign Investors May Face Troubles Over Pipeline Tariffs, Radio Free Europe / Radio Liberty, March 7, 2002 (on-line).</p> <p class=MsoFootnoteText><span style="mso-spacerun: yes"> </span></p> </div> <div style='mso-element:footnote' id=ftn41> <p class=MsoFootnoteText><a style='mso-footnote-id:ftn41' href="#_ftnref41" name="_ftn41" title=""><span class=MsoFootnoteReference><span style='mso-special-character: footnote'><![if !supportFootnotes]>[41]<![endif]></span></span></a> See:<span style="mso-spacerun: yes">  </span> Oil Industry of the Republic of Kazakhstan, <i>Oil &amp; Gas Vertical</i><span style="mso-spacerun: yes">  </span>(Analytical Journal, #15 [82]), September 2003 p. 152.</p> <p class=MsoFootnoteText><![if !supportEmptyParas]>&nbsp;<![endif]><o:p></o:p></p> </div> <div style='mso-element:footnote' id=ftn42> <p class=MsoFootnoteText><a style='mso-footnote-id:ftn42' href="#_ftnref42" name="_ftn42" title=""><span class=MsoFootnoteReference><span style='mso-special-character: footnote'><![if !supportFootnotes]>[42]<![endif]></span></span></a> Jeffrey Jones,<span style="mso-spacerun: yes">  </span> Kazakhstan aims for Caspian oil rush in 2004 (update 1), Reuters, June 27, 2003 (on-line).</p> <p class=MsoFootnoteText><![if !supportEmptyParas]>&nbsp;<![endif]><o:p></o:p></p> </div> <div style='mso-element:footnote' id=ftn43> <p class=MsoFootnoteText><a style='mso-footnote-id:ftn43' href="#_ftnref43" name="_ftn43" title=""><span class=MsoFootnoteReference><span style='mso-special-character: footnote'><![if !supportFootnotes]>[43]<![endif]></span></span></a> Gary Park,  Soaring share prices trouble Canadian securities regulators:<span style="mso-spacerun: yes">  </span>Trading activity of takeover companies under scrutiny as rumor mill churns out fresh speculation, dominated by talk of a BP bid for oil sands leader Suncor Energy, <i>Petroleum News Alaska,</i> March 31, 2003.</p> <p class=MsoFootnoteText><![if !supportEmptyParas]>&nbsp;<![endif]><o:p></o:p></p> </div> <div style='mso-element:footnote' id=ftn44> <p class=MsoFootnoteText><a style='mso-footnote-id:ftn44' href="#_ftnref44" name="_ftn44" title=""><span class=MsoFootnoteReference><span style='mso-special-character: footnote'><![if !supportFootnotes]>[44]<![endif]></span></span></a> PetroKazakhstan Inc.  Management s Discussion and Analysis, 2003, FirstQuarter, p. 2 (on-line).<span style="mso-spacerun: yes">   </span></p> </div> <div style='mso-element:footnote' id=ftn45> <p class=MsoFootnoteText><a style='mso-footnote-id:ftn45' href="#_ftnref45" name="_ftn45" title=""><span class=MsoFootnoteReference><span style='mso-special-character: footnote'><![if !supportFootnotes]>[45]<![endif]></span></span></a> PetroKazakhstan s web site can be accessed at <i>http://www.petrokazakhstan.com</i>. </p> <p class=MsoFootnoteText><![if !supportEmptyParas]>&nbsp;<![endif]><o:p></o:p></p> </div> <div style='mso-element:footnote' id=ftn46> <p class=MsoFootnoteText><a style='mso-footnote-id:ftn46' href="#_ftnref46" name="_ftn46" title=""><span class=MsoFootnoteReference><span style='mso-special-character: footnote'><![if !supportFootnotes]>[46]<![endif]></span></span></a><span style="mso-spacerun: yes">  </span>See:<span style="mso-spacerun: yes">  </span> Management s Discussion and Analysis, 2003 (first quarter), p. 14 (on-line).</p> <p class=MsoFootnoteText><![if !supportEmptyParas]>&nbsp;<![endif]><o:p></o:p></p> </div> <div style='mso-element:footnote' id=ftn47> <p class=MsoFootnoteText><a style='mso-footnote-id:ftn47' href="#_ftnref47" name="_ftn47" title=""><span class=MsoFootnoteReference><span style='mso-special-character: footnote'><![if !supportFootnotes]>[47]<![endif]></span></span></a><span style="mso-spacerun: yes">  </span> Questions concerning Kazakhstan s future go beyond oil. <span style="mso-spacerun: yes">  </span></p> <p class=MsoFootnoteText><![if !supportEmptyParas]>&nbsp;<![endif]><o:p></o:p></p> </div> <div style='mso-element:footnote' id=ftn48> <p class=MsoNormal><a style='mso-footnote-id:ftn48' href="#_ftnref48" name="_ftn48" title=""><span class=MsoFootnoteReference><span style='font-size: 10.0pt;mso-bidi-font-size:12.0pt'><span style='mso-special-character:footnote'><![if !supportFootnotes]>[48]<![endif]></span></span></span></a><span style='font-size:10.0pt;mso-bidi-font-size:12.0pt'><span style="mso-spacerun: yes">  </span> Hurricane Abandons $100 Million Pipeline Deal. </span><span style='font-size:10.0pt;mso-bidi-font-size:9.0pt'><o:p></o:p></span></p> <p class=MsoFootnoteText><![if !supportEmptyParas]>&nbsp;<![endif]><o:p></o:p></p> </div> <div style='mso-element:footnote' id=ftn49> <p class=MsoFootnoteText><a style='mso-footnote-id:ftn49' href="#_ftnref49" name="_ftn49" title=""><span class=MsoFootnoteReference><span style='mso-special-character: footnote'><![if !supportFootnotes]>[49]<![endif]></span></span></a> See:<span style="mso-spacerun: yes">  </span> PetroKazakhstan gets new pipe for fast oil exports, Reuters, June 24, 2003 (on-line).</p> <p class=MsoFootnoteText><![if !supportEmptyParas]>&nbsp;<![endif]><o:p></o:p></p> </div> <div style='mso-element:footnote' id=ftn50> <p class=MsoFootnoteText><a style='mso-footnote-id:ftn50' href="#_ftnref50" name="_ftn50" title=""><span class=MsoFootnoteReference><span style='mso-special-character: footnote'><![if !supportFootnotes]>[50]<![endif]></span></span></a> $100,000,000 * 100 * 8 / 7 = $11,428,571,429.</p> <p class=MsoFootnoteText><![if !supportEmptyParas]>&nbsp;<![endif]><o:p></o:p></p> </div> <div style='mso-element:footnote' id=ftn51> <p class=MsoFootnoteText><a style='mso-footnote-id:ftn51' href="#_ftnref51" name="_ftn51" title=""><span class=MsoFootnoteReference><span style='mso-special-character: footnote'><![if !supportFootnotes]>[51]<![endif]></span></span></a>  Kazakhstan (country briefing report).</p> <p class=MsoFootnoteText><![if !supportEmptyParas]>&nbsp;<![endif]><o:p></o:p></p> </div> <div style='mso-element:footnote' id=ftn52> <p class=MsoFootnoteText><a style='mso-footnote-id:ftn52' href="#_ftnref52" name="_ftn52" title=""><span class=MsoFootnoteReference><span style='mso-special-character: footnote'><![if !supportFootnotes]>[52]<![endif]></span></span></a> Phillips Petroleum Co.,  Kashagan Declared Commercial (press release), June 28, 2002<span style="mso-spacerun: yes">  </span>(on-line at <i>http://www.phillips66.com/newsroom/NewsReleases/Print/rel396.doc</i>).</p> <p class=MsoFootnoteText><![if !supportEmptyParas]>&nbsp;<![endif]><o:p></o:p></p> </div> <div style='mso-element:footnote' id=ftn53> <p class=MsoFootnoteText><a style='mso-footnote-id:ftn53' href="#_ftnref53" name="_ftn53" title=""><span class=MsoFootnoteReference><span style='mso-special-character: footnote'><![if !supportFootnotes]>[53]<![endif]></span></span></a><span style="mso-spacerun: yes">   </span> The Baku-Tbilisi-Ceyhan Pipeline and BP:<span style="mso-spacerun: yes">  </span>A Financial Analysis, p. 9.<span style="mso-spacerun: yes">  </span></p> <p class=MsoFootnoteText><![if !supportEmptyParas]>&nbsp;<![endif]><o:p></o:p></p> </div> <div style='mso-element:footnote' id=ftn54> <p class=MsoFootnoteText><a style='mso-footnote-id:ftn54' href="#_ftnref54" name="_ftn54" title=""><span class=MsoFootnoteReference><span style='mso-special-character: footnote'><![if !supportFootnotes]>[54]<![endif]></span></span></a>  The Baku-Tbilisi-Ceyhan Pipeline and BP:<span style="mso-spacerun: yes">  </span>A Financial Analysis, pp. 25-29.</p> <p class=MsoFootnoteText><span style="mso-spacerun: yes"> </span></p> </div> <div style='mso-element:footnote' id=ftn55> <p class=MsoFootnoteText><a style='mso-footnote-id:ftn55' href="#_ftnref55" name="_ftn55" title=""><span class=MsoFootnoteReference><span style='mso-special-character: footnote'><![if !supportFootnotes]>[55]<![endif]></span></span></a><span style="mso-spacerun: yes">  </span> The Baku-Tbilisi-Ceyhan Pipeline and BP:<span style="mso-spacerun: yes">  </span>A Financial Analysis, p. 11.</p> <p class=MsoFootnoteText><![if !supportEmptyParas]>&nbsp;<![endif]><o:p></o:p></p> </div> <div style='mso-element:footnote' id=ftn56> <p class=MsoFootnoteText><a style='mso-footnote-id:ftn56' href="#_ftnref56" name="_ftn56" title=""><span class=MsoFootnoteReference><span style='mso-special-character: footnote'><![if !supportFootnotes]>[56]<![endif]></span></span></a> Platt s Global Energy,  U.S. hopeful of cross-Caspian oil export agreements by end-2003, June 3, 2003 <i>(http://www.platts.com/features/caspian/related.shtml).<o:p></o:p></i></p> <p class=MsoFootnoteText><![if !supportEmptyParas]>&nbsp;<![endif]><o:p></o:p></p> </div> <div style='mso-element:footnote' id=ftn57> <p class=MsoFootnoteText><a style='mso-footnote-id:ftn57' href="#_ftnref57" name="_ftn57" title=""><span class=MsoFootnoteReference><span style='mso-special-character: footnote'><![if !supportFootnotes]>[57]<![endif]></span></span></a> For background see:  The Baku-Tbilisi-Ceyhan Pipeline and BP:<span style="mso-spacerun: yes">  </span>A Financial Analysis, pp. 10-11, 28-31.</p> <p class=MsoFootnoteText><![if !supportEmptyParas]>&nbsp;<![endif]><o:p></o:p></p> </div> </div> </body> </html>